Barrier Option

  

Categories: Derivatives

Shares of a well-known fin-tech company are trading at $80. A Wall Street trader decides to buy knock-out barrier call options for the shares with a knock-out barrier of $95. Expiration date arrives, with the shares trading at $97. Now the options are expired and worthless.

In English? A barrier option is an option for which the payoff relies on the underlying asset exceeding or reaching a predetermined price.

It comes in two varieties: knock-in and knock-out. Knock-in means the option is worthless until the asset reaches the designated price, while knock-out means it is worthless if it exceeds said price. So, had the shares in our example been trading at $94 when the option expired, our Wall Street trader would have been in a much better position.

It's also a type of Trojan but, um, that's really a different story.

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