Define: Knock-In Option

Business, Legal & Accounting Glossary

Definition: Knock-In Option



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Full Definition of Knock-In Option


A knock-in option or “trigger” option is a type of barrier option that is latent and only begins to function as a normal option once a certain price level is reached before expiration. A knock-in option might not knock in at all. A knock-in option is typically a currency or commodity option. For a knock-in option, the knock-in option writer sets the limit hoping to restrict losses if there is a sharp price move. Higher implied volatilities suggest a greater probability of triggering the barrier and knocking in the knock-in option. A knock-in option seller removes some of the price exposure and buyer pays less for a knock-in option because it offers only limited profit opportunity. Any barrier options, including a knock-in option, is activated or de-activated once the price of the underlying financial instrument reaches a set level. The opposite of a knock-in option is a knock-out option. Knock-in option investments are suitable for investors with strong directional views or premium constraints.


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Definition Sources


Definitions for Knock-In Option are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 10th February, 2020