Definition of Knock-out option:
That pays a benefit only if a specified event (such as a certain change in the price of underlying asset) does not occur.
A knock-out option is a type of barrier option. Barrier options are typically classified as either knock-out or knock-in. A knock-out option ceases to exist if the underlying asset reaches a predetermined barrier during its life. A knock-in option is the opposite of the knock-out. Here, the option is activated only if the underlying asset reaches a predetermined barrier price.
A knock-out option is an option with a built-in mechanism to expire worthless if a specified price level in the underlying asset is reached. A knock-out option sets a cap on the level an option can reach in the holder's favor. As knock-out options limit the profit potential for the option buyer, they can be purchased for a smaller premium than an equivalent option without a knock-out stipulation. .
How to use Knock-out option in a sentence?
- Knock-out options limit losses, but also potential profits.
- There are two types of knock-out options: up-and-out barrier options and down-and-out options.
- Knock-out options are a type of barrier option, which expire worthless if the underlying asset's price exceeds or falls below a specified price.
Meaning of Knock-out option & Knock-out option Definition