Investor Glossary-knock-out optionInvestor Glossary-knock-out optionInvestor Glossary-knock-out optionInvestor Glossary-knock-out optionInsightful stock market charts - Click here
investor
Categories    # A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Knock-out Option

The HTML to link to this page
 

A knock-out option is a type of barrier option that expires worthless if a specific price threshold is crossed by the option's underlying security. A knock-out option is typically a currency or commodity option. For a knock-out option, the option writer sets the limit, with the aim of restricting his losses in the event of a sharp price move. For example, in a knock-out option, if the current price for gold is $96/oz., the writer offers a $100 call with a $108 knock-out limit. The knock-out option lets the option writer remove exposure to large losses. Correspondingly, an option buyer pays less for a knock-out option because it offers only limited profit opportunity. A knock-out option investor benefits when expected price moves are small. A knock-out option can also be structured with a rebate feature so that when the knock-out level is reached, the buyer will receive a small payout. Any barrier options, including a knock-out option, is activated or de-activated once the price of the underlying financial instrument reaches a set level. The opposite of a knock-out option is a trigger option or knock-in option.



Rate this knock-out option definition...

Learn about investing with the Investor Glossary Term of the Day


Click here for insightful stock market charts. Where is the market headed? The answer may surprise you. Find out
with the exclusive & Barron's recommended charts of Chart of the Day.


Popular Terms: limit order, EBITDA, reverse mortgage, per diem, balance sheet, APR, option premium, cancelled check, required rate of return, debt service coverage, covered put, wholly-owned subsidiary, Key Rate Duration, dividends payable, liquidity ratio, deferred revenue, labor relations, quality assurance, diluted share, margin rate, 144a, inflation, ex-dividend, in escrow, risk management, retained earnings, deferred tax, FICO score, 401a, stock split, 1035 exchange, phantom income, command economy, FTSE, minority interest, irrevocable trust, VIX, stock market close, average price per share, Zero Cost Collar, open position, 1031 exchange, current ratio, ex-dividend date, implied volatility, annual return, real GDP, LIBOR, class C shares


Accounting | Banking | Bonds | Brokers | Economy | Futures | Mutual Funds | Options | Real Estate | Retirement | Stocks | Taxes | Technical Analysis
Home | Term of the Day | Suggest a Term | Chart of the Day | Dogs of the Dow
©2004-2016 Investor Glossary - All rights reserved - Terms of Use