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Barrier Options - Definition
Barrier Options, also known as Knock-In Options or Knock-Out Options,
are exotic options which comes into existence or goes out of existence when certain prices has been reached.
Barrier Options - 4 Types
There are 4 types of Barrier Option features:
Up-and-In : Underlying asset needs to move up and beyond barrier price for the barrier option to become active.
Up-and-Out : Barrier option becomes de-activated if the underlying asset moves up beyond the barrier price.
Down-and-In : Underlying asset needs to move down and beyond barrier price for the barrier option to become active.
Down-and-Out : Barrier option becomes de-activated if the underlying asset moves down beyond the barrier price.
Barrier Options - Knock-In Options
Becomes active only after the underlying asset
crosses a certain price, known as the barrier.
Barrier Options - Knock-Out Options
Knock-Out Barrier Options start their life activated. Crossing the barrier terminates the
option.
Barrier Options - Double Barrier Options
Double Barrier Options or better known as Double Knock-Out Options, have 2 knock-out prices instead of just one,
terminating the option even when the underlying asset goes the other way.
Advantages of Barrier Options
1. Cheaper than conventional options
2. Higher resulting profit than conventional options should barrier criterias are satisfied.
Disadvantages of Barrier Options
1. Higher risk of loss due to barrier features.
2. Not publicly traded.
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