Cliquet Option

A chain of options, each struck where the last one ended

A cliquet — or ratchet — is a series of forward-starting options whose strike resets at each observation date to wherever the underlying then stands. The payoff is the sum of the period returns, each usually capped and floored. Because the strike follows the market, the buyer is never left holding an option struck somewhere the underlying has long since left, which is what makes cliquets the standard engine inside capital-protected notes.

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What the lesson covers

1. What it is
2. How it works
3. Why it’s used
4. Caps, floors and what they cost
5. Risks to watch

Key terms

• Reset date — The date on which the strike for the next period is set to the underlying’s current level.
• Forward-starting option — An option whose strike is fixed at a future date rather than today, the building block of a cliquet.
• Local cap and floor — The limits applied to each period’s return before the periods are summed.
• Global cap and floor — Limits applied to the total payoff after the individual period returns have been added together.
• Forward volatility — The volatility expected between two future dates, which is what a cliquet is priced on.
• Reverse cliquet — A variant paying a high fixed coupon reduced by the sum of the negative period returns.

In practice

Cliquets sit inside a large share of the capital-protected notes sold to retail and insurance investors in Europe and Asia, and the exposure they create is one of the structural risks equity derivatives desks manage rather than trade. The desk’s position is the mirror of the note book, and unwinding it is a matter of years rather than days.

Read next

• OTC Equity Option — A custom, bilaterally negotiated option
• Variance Swap — Trade realized volatility directly
• Range Accrual Note — A coupon that only earns on the days you are right

In the app, Cliquet Option carries a five-step lesson, a worked example and a bank of twelve questions drawn differently every sitting.

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Educational content only. Nothing here is financial advice, an offer to trade, or a recommendation to buy or sell any instrument.