Knock-In and Knock-Out Option

Knock-in and knock-out are types of exotic options, known as barrier or path-dependent options, where the existence of the option is contingent on whether the underlying hits a specific price level prior to the expiry. A knock-out option ‘knocks out’ i.e. loses all of its value if the underlying hits or moves beyond a set price at any time to expiry. This is the mirror of a knock-in option, which ‘knocks in’ i.e. the option only appears if the underlying achieves a pre-set price prior to expiry.