European and american barrier options trading hours
A knock in contract starts out inactive and only becomes active when the underlying security reaches a predetermined price that is specified in the contract. This price is known as the knock in price. A knock out contract starts out active, but is automatically cancelled if the underlying security reaches a predetermined price known as the knock out price. Once a knock out contract is cancelled, it's worthless cannot be reactivated even if the underlying security reverts in price.
There are two main types of knock in contracts and two main types of knock out contracts. Knock ins can be either up-and-in or down-and-in, and knock outs can be either up-and-out or down-and-out.
Further details on each these, with examples, can be found below. An up and in barrier options contract starts out dormant, and contains a knock in price that is above the current price of the underlying security. It only becomes active if the underlying security moves above the knock in price. If the expiration date is reached without the underlying security reaching the knock in price then the contract expires without any value.
Although some contracts pay the holder a rebate it is usually only a small percentage of the original price. Alternatively you could sell the contracts at some point prior to the expiration date if you were able to make a profit in that way.
A down and in barrier options contract also starts out dormant. The knock in price is set at a price that is below the current trading pricing of the underlying security, and the contract is activated only if the security falls below that knock in price. As with an up and in, if the security does not reach the knock in price by the expiration date then the contract expires worthless.
However you would only receive your profits in cash. You may also be able to sell your contracts for profit at some point before the expiration date if their value had increased.
An up and out barrier option is a type of knock out contract, which means it starts out active. The contract automatically expires, though, if the price of the underlying asset moves above the specified knock out price before the expiration date. If the knock out price is reached then the contract is terminated permanently and basically ceases to exist.
If you owned contracts with the above characteristics, then you would be hoping for the underlying stock to move above the strike price, but stay below the knock out price. A down and out barrier options contract is also a type of knock out, meaning that the contract starts out active. With a down and out, the knock out price is set at a price below the current price of the underlying security.
Should the price of the security falls below the knock out price at any time during the term of the contract, then the contract would also expire.
If you bought contracts with the above terms, then you would be anticipating the underlying stock to fall in value, but only by a moderate amount.
If they were cash settled options, then you would receive a pay-out under those circumstances. Double barrier options are another form of knock out contract, also known as double knock-outs.
These are effectively a combination of the up and out contract and the down and out contract. They have two knock out prices: Therefore, a double barrier can be knocked out if the price of the security moves significantly in either direction.
This increases the risk of the holder of the contract seeing their investment expire worthless. Barrier options carry a higher risk to the holder than the more standard types of contracts.
With a knock in contract, the holder needs the price of the underlying security to move a certain amount if they are to exercise for a profit. You can call or put in American , Bermudan , or European exercise style. But they become activated or extinguished only if the underlying reaches a predetermined level the barrier. If the option expires inactive, then it may be worthless, or there may be a cash rebate paid out as a fraction of the premium. Once it is out, it's out for good.
Also note that once it's in, it's in for good. In-out parity is the barrier option's answer to put-call parity. If we combine one "in" option and one "out" barrier option with the same strikes and expirations, we get the price of a vanilla option: A simple arbitrage argument—simultaneously holding the "in" and the "out" option guarantees that exactly one of the two will pay off identically to a standard European option while the other will be worthless.
The argument only works for European options without rebate. A barrier event occurs when the underlying crosses the barrier level. While it seems straightforward to define a barrier event as "underlying trades at or above a given level," in reality it's not so simple. What if the underlying only trades at the level for a single trade? How big would that trade have to be? Would it have to be on an exchange or could it be between private parties?