Knock in option

Knock-in options are a type of barrier option. Specifically, a knock-in option is a financial instrument that only becomes an option when a certain price is reached. Thus, if the price is not reached, it is as if the contract never existed. Conversely, if the underlying asset hits the specified barrier, the knock-in option becomes effective. The difference between a knock-in and knock-out option is that a knock-in option does not exist until the underlying asset reaches a barrier.

In contrast, a knock-out option ceases to exist when the underlying asset reaches a barrier. This type of option is most commonly found in markets such as currencies or commodities, and is generally reserved for institutional investors.