What is a down-and-out option?
Down-and-out is a type of option in which an investor who owns this option cannot apply if the price of security that is the basis of the option falls below a certain level. This lower level is a barrier, so this option is also known as the Down-and-Out barrier. In principle, this possibility becomes worthless as soon as the price falls below the predetermined barrier, which becomes all the future price movements of the basic unnecessary after the barrier. Since the existence of a barrier with down-and-out makes it much more risky, it can usually be purchased for a discount compared to other options.
Options are investment vehicles that allow investors to speculate on the price of some basic security, which is usually stock without owning it. There are options for calls that give the owner the right to purchase shares and give options that the owner provides the right to sell shares of shares. Normally the possibility can be applied after the background will achieve a predetermined strikeprices. However, the possibilities of the barrier add a second price level, which also factor in the value. One of the possibility of barrier is the possibility of down and out.
The distinguishing characteristics of the possibilities of mines and out are that the barrier price is set below the current price of the shares and that the possibility will become invalid after reaching the barrier. For example, Down-and-Out Call may have the current price of $ 130 for the share, a $ 150 strike price per share and a barrier price of $ 100 per share. If the price falls below $ 100 per share, the call will drop and is invalid even if the price subsequently exceeds the price of a strike of $ 150.
As a result of the way in which the possibility of down and out is structured, the seller can benefit from two ways. First, the basic price could reach the net price before the option of the option. In addition, the price can reach the possibility of barrier. Both of these conclusions mean that the option sellerHe will have worthless options, which means that the dealer of the bonus pockets has paid the buyer and has no further obligations.
Since two possible negative results for the buyer alleviate the value of down-and-out, the buyer must have some compensation. As a result, these options often come at a lower price than options that do not have barriers. The bonuses for the possibilities of mines and out also depend on the relationship of the stock price to the strike price and barrier, as well as the volatility of shares.