A knock-out option is an option with a built-in mechanism to expire worthless if a specified price level is exceeded. A knock-out option sets a cap to the level an option can reach in the holder's favor. As knock-out options limit the profit potential for the option buyer, they can be purchased for a smaller premium than an equivalent option without a knock-out stipulation.

Barrier options are typically classified as either knock-out or knock-in. A knock-out option ceases to exist if the underlying asset reaches a certain predetermined barrier during its life. Contrary to a knock-out option, a knock-in option only comes into existence if the underlying asset reaches a predetermined barrier price. Knock-out options are considered to be exotic optionsand they are primarily used for commodities and currency options.

Knock-Out Option

A down-and-out option is a type of knock-out option. A down-and-out barrier option gives the holder the right, but not the obligation, to purchase or sell an underlying asset at a predetermined strike price if the underlying asset's price did not go below a specified barrier during the reverse knock out currency option life.

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If the underlying asset's price falls below the barrier at any reverse knock out currency option in the option's life, the option ceases to exist and is worthless.

Beeoptions binary options trading live, the down-and-out call option ceases to exist.

Contrary to a down-and-out barrier option, an up-and-out barrier option gives the holder the right to buy or sell an underlying asset as a specified strike price if the asset has not gone above a specified barrier during the option's life. An up-and-out option is only knocked out if the price of the underlying asset increases above the barrier.

Therefore, the option would automatically expire worthless. Dictionary Term Of The Day. A measure of what it costs an investment company to operate a mutual fund. Latest Videos PeerStreet Offers New Way to Bet on Housing New to Buying Bitcoin? This Mistake Could Cost You Guides Stock Basics Economics Basics Options Basics Exam Prep Series 7 Exam CFA Level 1 Series 65 Exam.

Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education. What is a 'Knock-Out Option' A knock-out option is an option with a built-in mechanism to expire worthless if a specified price level is exceeded.

Types of Knock-Out Options A down-and-out option is a type of knock-out option. Down-and-Out Option Rebate Barrier Option Double Barrier Option Knock-In Option Exotic Option Up-and-In Option Up-And-Out Option Double One-Touch Option Call Option. Content Library Articles Terms Videos Guides Slideshows FAQs Calculators Chart Advisor Stock Analysis Stock Simulator FXtrader Exam Prep Quizzer Net Worth Calculator. Work With Investopedia About Us Advertise With Us Write For Us Contact Us Careers.

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