Forward starting option

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The forward-start option is one which commences at some specified future date with an expiration further in the future. Since the asset price at the start of this option is not known a priori is is comon to specify that the strike will be set so that the option is initially at the money or a certain percentage in the money or out of the money.

This contract can be used to give an investor exposure to forward volatility.

[edit] Valuation

In a Black-Scholes world the value of an at-the-money option is proportional to the asset price. The value of the forward-start option is therefore a multiple of the current asset price, with that multiple depending on forward volatility.