Knock-Out Option

A knock-out option is a type of option that expires if the underlying asset reaches a certain price. This is in contrast to a regular option, which can be exercised at any time before expiration.

Knock-out options are often used as a way to limit risk. For example, a trader might buy a knock-out call option on a stock that they believe is overvalued. If the stock price falls below the knock-out level, the option will expire worthless, and the trader will lose only the premium they paid for the option.

Knock-out options can also be used to create synthetic positions. For example, a trader might buy a knock-out call option and sell a regular call option on the same underlying asset. This would create a synthetic short position, which would profit if the stock price falls.

Knock-out options are a complex financial instrument, and they should only be used by experienced traders. However, they can be a useful tool for managing risk or creating synthetic positions.

Here are some additional details about knock-out options:

• The knock-out level is the price at which the option expires.
• The knock-out level is usually set at a price that is above or below the current market price of the underlying asset.
• The premium for a knock-out option is higher than the premium for a regular option with the same strike price and expiration date.
• Knock-out options are often used in trading strategies such as covered calls and protective puts.