What is the possibility of elimination?
Knock-out is a type of option that is worthless if the price of the security for which this option is above or below the predetermined price level. If this happens, this option is discarded and no longer cares about what is the price of basic security. The possibility of Knock-out is one of the specific types of a barrier option, which generally comes for investors a little discount compared to the so-called vanilla options. This is because this type of possibility becomes worthless at a time when other possibilities become extremely profitable. Options
are investment vehicles that allow investors to speculate on the price of basic security without acquiring the physical ownership of this security, even if they can eventually own safety in the transaction. The buyer pays the price known as the bonus for the possibility that can be applied if the price reaches a predetermined strike price, which is also known as in money. If the basic security is unable to go into money before the choice expires, the contractAnd it is worthless. With the possibility of elimination comes the second price level, which makes the possibility worthless, even if it is in money.
As an example of how the knock-out option works, imagine that the buyer buys the possibility to buy, also known as a call option, security currently for $ 90 (USD) if the strike is $ 100. Seller of options or writer adds a Knock-Out $ 120 barrier. This means that even if the price exceeds the price of a strike of $ 100, this option will be worthless as soon as the price reaches $ 120.
This example illustrates the risk of buying the possibility of knock-out. She was vanilla vanilla without a barrier, the possibility would become extremely profitable for the buyer if they were directed through a barrier and $ 120. Such an example shows the reason why Burmo Rier is compared to vanilla options, as the basic security in the barrier options must settle inPrice windows, neither too high, nor too low to work for the buyer.
The opposite of Knock-Out is the possibility of knock-in that allows the buyer to exercise no matter what the basic price of security does after this barrier is achieved. Knock-Out options are one way that the option writer can protect against major losses. By setting the barrier to a reasonable amount, it prevents money from getting too far.