Cliquet option

(1) For example, a six-month cliquet option to be settled monthly, with an initial exercise price of 100, would be worthless at the end of the first month if the price of the underlying on that date was 90. The exercise price for the next month would automatically be reduced to 90. If the underlying moved to 105 at the end of the second month, the holder would obtain a gain and the exercise price would automatically be increased to 105. Cliquet options allow holders to lock in their gains on the underlying during each periodic interval throughout the life of the option, so that they hold on to their gains even if the underlying subsequently moves in the other direction. Cliquet options are therefore comparable to a series of at-the-money forward start options, the first option being activated immediately, the second option being activated when the first one expires, and so on. (2) A cliquet option is a specific type of path-dependent option.