Path Dependent Option

If you’ve dabbled with investing in options and are getting a bit bored of your options’ options...look no further: the path dependent option is a literal (okay, no literal) roller coaster.

Regular old options are contracts, following an underlying security. When the life of the option expires, the ending-price determines what the option holder decides to do with it. Only the ending-price matters, like how in a basketball game, only the final score matters.

Path dependent options are options whose value is based on the price-path that the underlying security took during the life of the option. That would be like if basketball games were determined not by the ending score, but also by what happened during the game itself. How many fouls were there? Time on the clock? Sportsmanship? Yeah.

There are soft path dependent options and hard path dependent options. The soft paths are simpler: they take into account one price point during the life of the option...maybe the highest or lowest price traded, or another event. Barrier options, lookback options, and chooser options are all soft path dependent options.

More adventurous and analytical-savvy traders go hard path. Hard path dependent options take much more info into account. For instance: the trading history of the underlying asset, average prices at certain times...all kinds of things. This is the rodeo of the options playing field.