Knockout Option

Knockout Option
   An option that is knocked out, or nullified, when the underlying instrument reaches a certain price. The option writer sets the limit, with the aim of restricting his losses if the price of the underlying financial instrument moves very sharply. In exchange the buyer pays less for an option which offers only limited opportunities for profit. For example, an option writer might sell an option on a share now trading at $95 giving the option buyer the right to buy or 'call' the share at $100, but with a knockout limit of $109. If the share price rises above $100 the buyer will exercise the option. If the price rises sharply above $109 then the option is nullified and the option writer has removed his exposure to large losses. ► See also Barrier Option.

Financial and business terms. 2012.

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