BROWSE

Knock-In Option

What is a 'Knock-In Option'

A knock-in option is a latent option contract that begins to function as a normal option ("knocks in") only once a certain price level is reached before expiration. Knock-in options are a type of barrier option that may be either down-and-in option or an up-and-in option. A barrier option is a type of contract in which the payoff depends on the underlying security's price and whether it hits a certain price within a specified period.

Explaining 'Knock-In Option'

There are two main types of barrier option: knock-in and knock-out options. Technically, a knock-in option is a type of contract that is not an option until a certain price is met, so if the price is never reached it is as if the contract never existed. However, if the underlying asset reaches a specified barrier, the knock-in option comes into existence. The difference between a knock-in and knock-out option is that a knock-in option comes into existence only when the underlying security reaches a barrier, while a knock-out option ceases to exist when the underlying security reaches a barrier.

Down-and-In Option

For example, assume an investor purchases a down-and-in put option contract with a barrier price of $90 and a strike price of $100, when the underlying security was trading at $110, with three months until expiration. If the price of the underlying security reaches $90, the option comes into existence and becomes a vanilla option with a strike price of $100. Thereafter, the holder of the option has the right to sell the underlying asset at the strike price of $100. The put option remains active until the expiration date, even if the underlying security rebounds from $90. However, if the underlying asset does not fall below the barrier price at any point during the life of the contract, the down-and-in option expires worthless.

Up-and-In Option

Contrary to a down-and-in option, an up-and-in option comes into existence only if the barrier is reached, which is higher than the underlying asset's price. For example, assume a trader purchases a one-month up-and-in call option on an underlying asset when it was trading at $40 per share. The up-and-in call option contract has a strike price of $50 and a barrier of $55. If the underlying asset did not reach $55 at any point during the life of the option contract, it would expire worthless. However, if the underlying asset rose to $55 or greater, the call option would come into existence.

Knock In Option FAQ

What is knock in price?

A knock-in option is a contract type that is not recognized as an option until a specific price is met. So if the contract is never said to exist if the specific price is never met. However, if the underlying asset arrives at a predefined obstruction, the knock-in option comes into existence.

What is knock in knock out option?

Knock-in options is recognized only when a specific price set for the asset is met, while knock-out options cease to exist if the specific price is met

What is European knock in?

A European knock in (eki) is a vanilla option with a European barrier. That is, it only matters where the underlying asset is in relation to the barrier on the option's expiry date. If there is a payout, it is that of the underlying vanilla option.

Further Reading


Knock‐in American options
onlinelibrary.wiley.com [PDF]
… Knock-in options with a trigger clause are closely related to barrier options. Barrier options are common path-dependent options traded in the financial markets. The derivation of the price formula for barrier options was pioneered by Merton (1973) in his seminal paper on option …

Pricing and hedging of American knock-in optionsPricing and hedging of American knock-in options
jod.pm-research.com [PDF]
… Knock-in options with a trigger clause are closely related to barrier options. Barrier options are common path-dependent options traded in the financial markets. The derivation of the price formula for barrier options was pioneered by Merton (1973) in his seminal paper on option …

Static hedging and pricing American knock-in put optionsStatic hedging and pricing American knock-in put options
www.sciencedirect.com [PDF]
… Knock-in options with a trigger clause are closely related to barrier options. Barrier options are common path-dependent options traded in the financial markets. The derivation of the price formula for barrier options was pioneered by Merton (1973) in his seminal paper on option …

One-touch double barrier binary option valuesOne-touch double barrier binary option values
www.tandfonline.com [PDF]
… Knock-in options with a trigger clause are closely related to barrier options. Barrier options are common path-dependent options traded in the financial markets. The derivation of the price formula for barrier options was pioneered by Merton (1973) in his seminal paper on option …

Monte-Carlo importance sampling simulation method for pricing the European knock-in optionMonte-Carlo importance sampling simulation method for pricing the European knock-in option
en.cnki.com.cn [PDF]
… Knock-in options with a trigger clause are closely related to barrier options. Barrier options are common path-dependent options traded in the financial markets. The derivation of the price formula for barrier options was pioneered by Merton (1973) in his seminal paper on option …

Risk Management Lessons from 'Knock‐in Knock‐out'Option DisasterRisk Management Lessons from 'Knock‐in Knock‐out'Option Disaster
onlinelibrary.wiley.com [PDF]
… Knock-in options with a trigger clause are closely related to barrier options. Barrier options are common path-dependent options traded in the financial markets. The derivation of the price formula for barrier options was pioneered by Merton (1973) in his seminal paper on option …

Pricing double barrier options using Laplace transformsPricing double barrier options using Laplace transforms
link.springer.com [PDF]
… Knock-in options with a trigger clause are closely related to barrier options. Barrier options are common path-dependent options traded in the financial markets. The derivation of the price formula for barrier options was pioneered by Merton (1973) in his seminal paper on option …

Pricing Parisan OptionsPricing Parisan Options
jod.pm-research.com [PDF]
… Knock-in options with a trigger clause are closely related to barrier options. Barrier options are common path-dependent options traded in the financial markets. The derivation of the price formula for barrier options was pioneered by Merton (1973) in his seminal paper on option …



Q&A About Knock-In Option


What is a knock-in option?

A knock-in option is a latent option contract that begins to function as a normal option ("knocks in") only once a certain price level is reached before expiration.

How do you use them in your portfolio strategy?

You can use them as part of your portfolio strategy by using them as hedges against risk or for speculation purposes.

How do down-and-in and up-and-in options differ from each other?

Down and in options begin to function as normal vanilla call or put contracts if the underlying asset hits the barrier price during the life of the contract whereas up and in options begin to function as normal vanilla call or put contracts if the underlying asset rises above the barrier price during the life of the contract.

What is Knock-In Option?

Knock-in option is a type of derivative security that gives the holder the right to buy an underlying asset at a predetermined price.

What are some examples of knock-in options?

Some examples include equity, debt and commodity derivatives.

What type of barrier options exist?

Down-and-in and up-and-in.

What does it give the holder?

It gives the holder the right to buy an underlying asset at a predetermined price.

Are there different types of barrier options?

Yes, there are two types of barrier options.