Knock-Out Option

Search Dictionary

Definition of '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.

Do you have a trading or investing definition for our dictionary? Click the Create Definition link to add your own definition. You will earn 150 bonus reputation points for each definition that is accepted.

Is this definition wrong? Let us know by posting to the forum and we will correct it.