Knock-Out Option

An exotic option that automatically expires worthless if the underlying asset's price reaches a predetermined barrier level. Knock-out options are cheaper than standard (vanilla) options because the barrier feature limits the holder's potential payoff. They come in two varieties: "up-and-out" calls that terminate if the price rises above the barrier, and "down-and-out" puts that terminate if the price falls below it. These instruments are popular in currency markets and among institutional traders who want targeted exposure at a lower premium.