Knock-in Option

Moneybestpal Team

A knock-in option is a sort of exotic option that only becomes active if the price of the underlying asset reaches a specific predefined price threshold. In other words, the option won't "knock in" or become active until the price of the underlying asset crosses the "knock-in" barrier. The option remains inactive and expires worthless if the price of the underlying asset falls short of the knock-in barrier.

A knock-in option, which can be either a call or a put, gives the holder the choice to buy or sell the underlying asset at the knock-in price. The knock-in price is often fixed at a price that is either above or below the underlying asset's current market value. For instance, a knock-in call option might be programmed to only become active if the underlying asset's price hits $100, while a knock-in put option might only activate if the underlying asset's price falls below $50.

The usage of knock-in options is common among traders who wish to profit from a specific price movement but are unsure of whether the price will move in the desired direction. A knock-in option allows traders to lower the option premium cost while simultaneously lowering their downside risk. Knock-in options, however, are frequently regarded as being riskier and more complicated than ordinary options, and not all investors may find them suitable.

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