Barrier option
Definition · Level 12 · Exotics & structured
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An option that switches on (knock-in) or off (knock-out) if the underlying touches a set level before expiry. “Down” or “up” says whether that level is below or above today’s price.
Example
A down-and-out call, strike 100, barrier 80: it dies if the stock trades at 80.
Where Tradecraft teaches it
Level 12 · Exotics & structured, in the lesson “Barrier options: knock-in, knock-out and the one-touch”: An option that switches on or off when the price touches a level, and the parity that prices one half from the other.
Related terms
- Down-and-in putPut that exists only if the underlying first falls through a lower barrier.
- In-out parityA knock-in plus a knock-out with the same strike, barrier and expiry equals the vanilla option (ignoring rebates), so each costs less than the…
- Knock-inBarrier option that only comes alive if the underlying touches the barrier before expiry.
- Knock-outBarrier option that dies if the underlying touches the barrier before expiry, sometimes paying a small fixed rebate.
- One-touchPays a fixed prize if a level trades at any time before expiry.
- Reverse barrierBarrier placed where the option is already in the money (such as an up-and-out call).