Binary options are the trading options which are quite different from the regular vanilla options. These options yield a particular payout which is predetermined and anticipated in advance. The investor predicts the market movements and then takes the decision to select the underlying asset according to its value. The trader then fixes an amount to which he would be entitled only if the option ends up being in the money.

In the money option signifies that the binary option price has touched the underlying asset strike price at the end of the maturity period. If in any case the option price does not touch the underlying asset price before the expiry of the contract then it is termed as being out of the money. As the binary option have only two variants it is termed as binary which signifies numeral two or only two digits. This feature of binary options makes them very simple and not at all complicated for which their popularity is increasing day by day.

Binary options are of various kinds and are developed on variety of models. One such binary option model is a Lookback binary option model.

A look back binary option model extends the investor an opportunity where the trader or the investor acquires a right only at the expiry of the contract to exercise the option at the most advantageous rate which is experienced over the life of the option. Thus in simpler terms it can be quoted that the Lookback option is an option in which the trader can select the price which is to be made applicable in calculating the profits for the investment considering that this price should be valid at least at one point throughout the life of the option contract.

A normal option contract make the strike price either fixed or floating. But when the trader considers the Lookback option then the strike is fixed at the outset and the option pay out against the highest in the situation of a call option or the lowest spot rate if the option is a put option. This price is irrespective of the spot rate at expiry. The Lookback option is usually settled in cash and commands a larger premium than the relative vanilla option.

The strike for an optimal strike Lookback option, on the other hand, is not fixed until expiry, when it is set to be the highest (for a put) or lowest spot rate (for a call) over the option’s life and exercised for cash or physical against the spot rate prevailing at expiry.

Thus the Lookback model of the binary option grants the trader an opportunity to maximize the returns irrespective of the spot rate at the time of expiry. If the option turn out to be rosy or profitable at one particular point of time and the maturity date is yet to come then the trader can always book the profits with that particular price even at a late date. This signifies that the trader can actually consider a price which has already occurred and passed, but which can be activated only by a Lookback option model.

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