KNOCK-OUT OPTION

Today's word: KNOCK-OUT OPTION
Theme for this fortnight: FUTURES

An option with a built in mechanism to expire worthless, should a specified price level be exceeded. A knock-out option sets a cap to the level an option can reach, in favor of the holder. As knock-out options limit the profit potential for the option buyer, they can be purchased for a smaller premium than an equivalent option without a knock-out stipulation.