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: labor relations, 1031 exchange, wholly-owned subsidiary, margin rate, debt service coverage, phantom income, risk management, ex-dividend date, retained earnings, reverse mortgage, minority interest, required rate of return, FICO score, quality assurance, diluted share, open position, inflation, covered put, stock split, in escrow, cancelled check, real GDP, dividends payable, APR, liquidity ratio, FTSE, balance sheet, 1035 exchange, EBITDA, irrevocable trust, Key Rate Duration, ex-dividend, deferred tax, VIX, option premium, average price per share, implied volatility, current ratio, limit order, deferred revenue, per diem, Zero Cost Collar, annual return, 401a, stock market close, command economy, LIBOR, 144a, 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
©2004-2015 Investor Glossary - All rights reserved - Terms of Use