An option that is composed of a sequence of forward-starting options. The option’s strike price for the next maturity date is set to be equal to a positive constant (γ > 0) multiplied by the underlying price of the previous maturity date. This option has a built-in locking-in mechanism that assures the “observed” underlying price (and hence the intrinsic value) won’t decrease below (for a call) or increase above (for a put) the previous level it reached. With this feature, this option bears resemblance to the step-lock ladder option. The moving-strike option starts off like a standard option with a fixed strike, but with the passage of time, the strike is reset to the price attained by the underlying on pre-defined dates. For a call option, when the strike resets, the intrinsic value is automatically locked in so that if the underlying changes direction, dropping below the previous level at the next reset date, the option won’t shed any bit off its locked-in intrinsic value.

The intrinsic value will be locked in again if the underlying price moves up the current level at the next reset date. For example, a one-year moving-strike option with monthly payments will be equivalent to 12 forward-starting option each with its strike price and payoff. Each individual payoff is equal to the maximum of the asset price minus the strike price or zero. The strike price of each option is typically set at the beginning of each month. This strike is equal to the underlying price times the constant. It follows that the overall value of moving-strike call option is the sum of the values of its forward start call options.

This option, which is also known as a ratchet option or a cliquet option, is a popular product within the class of equity derivatives. Characteristically, it provides downside protection while at the same time allowing for upside potential.

Examples of a moving-strike option include moving-strike caps and moving-strike floors.