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Investment
Knock-Out Option
An exotic option that becomes worthless if the underlying asset hits a certain price level before expiry.
Knock-out options are cheaper than standard options because they carry extra risk. They are popular with traders who want lower premiums and believe the price won't hit the barrier. The opposite is a knock-in option.
It's a normal option with a trap door — if the price hits a certain level, the whole contract disappears.
Real world: A trader buys a knock-out call on Bitcoin with a £50,000 knock-out barrier. If Bitcoin touches £50,000 even once, the option is automatically cancelled and becomes worthless, even if Bitcoin later rises to £60,000.
💡 Knock-out options are cheaper but can suddenly disappear at the worst moment.