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


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