Knock-out option - Financial definition
Concise definition of the term knock-out option
A knock-out option is a type of barrier option that expires worthless if the underlying asset reaches a predetermined price level before expiration.
Comprehensive definition of the term knock-out option
Knock-out options are often used by investors to limit the risk of their option positions, as they provide lower premiums compared to standard options. In practice, these options are useful in hedging strategies or speculative trades where the investor has a strong view on price movements but wants to reduce costs; for example, a trader might use a knock-out call option to benefit from a potential price rise while avoiding high premiums, knowing that the option will cease to exist if the asset's price hits the barrier level, thereby reducing the potential loss.