Lookback Options are a type of exotic options contract offered by many over the counter (OTC) brokers. Unlike plain vanilla options, lookback options allow the buyer to avoid the dilemma of 'price regret' and minimize the effects of market timing. This is done by looking back at the performance of the underlying asset over the entire period of the option's life, and allowing the buyer to choose the highest or lowest level achieved during that period.

In a fixed strike lookback option, the buyer sets the strike price at the beginning of the option period at either the highest or lowest level achieved before the option's expiration. If the underlying asset's price is higher than the strike price at expiration, the buyer stands to make a profit. A floating strike lookback option works the same way, but sets the strike price at the time of expiration instead of at the beginning of the option period.

The popularity of lookback options comes from the fact that they are more flexible than traditional options. They give more control of the marketing entry or exit point to the buyer because the buyer can decide at EITHER the beginning OR the end of the term which strikes price to set. This helps to minimize the effects of negative market conditions, allowing a buyer to reap the most benefit from their investment.

However, lookback options are difficult to set up and relatively expensive when compared with other options contracts. They may not even be worth the expense, since the costs associated with buying the lookback option can easily nullify any profits the buyer might get if they had chosen the wrong strike price. Furthermore, lookback options are not available on any of the major exchanges, only OTC brokers who are willing to offer these type of contracts.

In conclusion, lookback options are an interesting derivative product and offer a useful way to hedge against or speculate on the movements of the underlying asset. They can provide the buyer with more control, but the potential rewards should be weighed against the costs associated with buying the option. If used correctly, lookback options can minimize the effects of market timing and offer the possibility of more consistent profits.