A strike reset option (and a European put option) which allows the holder to shout (and hence it is a form of shout option) during the life of the option in order to reset the strike price to the then prevailing spot price. By definition, a shout option gives the holder the right to ‘shout’ on one or more occasions during the life of the option so that to reconsider certain elements of the option such as the strike price or time to maturity. A strike reset put option allows the holder of the put option to ‘shout’ during the life of the option, upon which the strike is reset to the level of the underlying price prevailing at the time of the shout. Hence, if the holder does not shout during the life of the option, the payoff at expiration time (T) is:
No-shout payoff = max (X – ST, 0)
Where is the original strike price and ST is the prevailing underlying price.
However, if there is a shout at time (t) , then the payoff at expiration time (T) is calculated as follows:
Shout payoff = max (St – ST, 0)
The option’s holder will not shout unless St > X.
shout options allow the holder to ‘shout’ and consequently to reset the strike price when the option has a positive intrinsic value, in which case the holder will receive at expiration a specific amount in addition to the payoff from the option based on the adjusted strike price. As such, the holder can ‘lock in’ a specific amount of profit and still enjoy the right to avail upside potential.
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