Knock-in option - Financial definition
Concise definition of the term knock-in option
A knock-in option is a type of barrier option that only comes into existence and becomes active when the underlying asset's price reaches a predetermined barrier level. If the barrier is not reached, the option expires worthless.
Comprehensive definition of the term knock-in option
Knock-in options are commonly used by investors looking to hedge their portfolios or to speculate on the price movement of the underlying asset while mitigating upfront costs. These options are particularly useful in situations where the investor believes that the asset's price will reach the barrier level but is unsure about the overall price direction.
For instance, a company expecting significant price movements around earnings announcements might use knock-in options to manage risk. Market practices for knock-in options include incorporating them into complex trading strategies to leverage specific market scenarios or to achieve particular risk-return profiles without committing to the cost of standard options until certain conditions are met.