What is a 'Knock-Out Option'.
KIKO Option. A combination of a knock-in option and a knock-out option. More specifically, a KIKO option has two barriers: a knock-in barrier and a knock-out barrier. The option's payoff gets activated once the knock-in barrier is breached. However, once the knock-out barrier is touched, the option deactivates and dies out (gets knocked out). Oct 30, · A KIKO is simply a double barrier option. Crossing of a barrier is an event that knocks in (activates) an inactive option, or knocks-out (de-activates) an active option. These are more common in .
The option would automatically expire worthless. A knock-out may be used for several different reasons. As mentioned, the premiums on these options are typically cheaper than a similar non-knock-out option. A rebate barrier option is a barrier option that includes a rebate A put options gives the owner the right to sell a specified amount Trading options is not easy and should only be done under the guidance of a professional.
Futures contracts are available for all sorts of financial products, from equity indexes to precious metals. Trading options based on futures means buying call or put options based on the direction Index options are less volatile and more liquid than regular options.
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Learn how the strike prices for call and put options work, and understand how different types of options can be exercised So, the Knockout call is very attractive if we believe the USD will strengthen but never exceed our Knockout level because the premium is dramatically cheaper. As the option buyer is giving up some upside by having the Knockout feature, the premium is reduced dramatically.
As the option can be knocked out at any time over the life of the option, the knockout feature is very sensitive to the volatility of the underlying instrument. It is more sensitive than an ordinary option. This explains the dramatic reduction in premium. This is an ideal instrument for risk averse clients, as the much lower premium means the potential loss is much smaller than ordinary options. It is also ideal where the expected market move is relatively small, as the reduced premium makes the break-even more attractive and also gives the investor a more leveraged position i.
Knockout options can also be structured with a Rebate feature. Under the simple Knockout, when the knockout level is reached, the buyers option will expire worthless i. A Knockout with Rebate, means that when the Knockout level is reached, the buyer will receive a small payout. An investor buys a USD call at This performs the same as the previous example, except when the knockout level If the plain Knockout cost 1.
As the option can be knocked out at any time over the life of the option, the knockout feature is very sensitive to the volatility of the underlying instrument.
So, the Knockout call is very attractive if we believe the USD will strengthen but never exceed our Knockout level because the premium is dramatically cheaper.