Knock-In Option
Candlefocus EditorKnock-in options come in two forms: a down-and-in and an up-and-in option. A down-and-in option is triggered when the underlying asset has fallen below a certain barrier. In this case, the investor is protected if the asset’s price continues to fall, allowing them to benefit even if the price is lower than the barrier.
The up-and-in option is triggered when the underlying asset’s price rises above a certain predetermined price. The investor can then benefit from the appreciation of the asset without taking on the risk of the underlying asset’s price dropping.
Knock-in options are considered advantageous for investors as they offer flexibility and risk control. They can also be used to hedge an investor’s portfolio. Since the knock-in option does not become active until the underlying asset’s price moves past a certain level, an investor can receive the benefit of any appreciation without the risk of a steep pullback in the assets value.
In addition, knock-in options allow investors to customize their investment strategy by controlling when their option is activated. This means that if a stock is likely to encounter short-term volatility, the investor can choose to activate the knock-in option only if the asset’s price drops to a certain level. Similarly, if an upswing is predicted, the investor can set the activation point at a higher level.
Knock-in options are a favored option among experienced option traders as they offer a safe and strategic entry point into the market while mitigating potential losses. This is particularly useful for investors who want to limit their exposure to downward trends without limiting their potential gains.