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Knock-In Option

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A knock-in option or "trigger" option is a type of barrier option that is latent and only begins to function as a normal option once a certain price level is reached before expiration. A knock-in option might not knock in at all. A knock-in option is typically a currency or commodity option. For a knock-in option, the knock-in option writer sets the limit hoping to restrict losses if there is a sharp price move. Higher implied volatilities suggest a greater probability of triggering the barrier and knocking in the knock-in option. A knock-in option seller removes some of the price exposure and buyer pays less for a knock-in option because it offers only limited profit opportunity. Any barrier options, including a knock-in option, is activated or de-activated once the price of the underlying financial instrument reaches a set level. The opposite of a knock-in option is a knock-out option. Knock-in option investments are suitable for investors with strong directional views or premium constraints.



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