Quick Definition

A knock-out option is a type of barrier option that becomes void if the underlying asset's price reaches a specified level, known as the knock-out barrier.

Examples

• 1A trader buys a knock-out call option on a stock with a strike price of $50 and a knock-out barrier at $60. If the stock price hits $60, the option expires worthless.
• 2An investor purchases a knock-out put option on a commodity with a strike price of $100 and a knock-out barrier at $90. If the commodity price drops to $90, the option is knocked out.
• 3A company hedges against currency risk by using knock-out options to manage potential losses in foreign exchange rates.
• 4A portfolio manager uses knock-out options to limit downside risk while maintaining exposure to potential upside gains in a volatile market.

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