# Knock-In Option By [Allson](https://paragraph.com/@allson) · 2022-06-29 --- What is a Knock-In Option? -------------------------- A knock-in option is a latent option contract that begins to function as a normal option ("knocks in") only once a certain price level is reached before expiration. Knock-ins are a type of [barrier option](https://www.investopedia.com/terms/b/barrieroption.asp) that are classified as either a [down-and-in](https://www.investopedia.com/terms/d/daio.asp) or an [up-and-in](https://www.investopedia.com/terms/u/up-and-inoption.asp). A barrier option is a type of contract in which the payoff depends on the [underlying security's](https://www.investopedia.com/terms/u/underlying-security.asp) price and whether it hits a certain price within a specified period. ### KEY TAKEAWAYS * A knock-in option is a type of barrier option which is triggered only after the underlying asset's price reaches a certain specified barrier. * There are two types of knock-in options: down-and-in and up-and-in. In the former, the option is triggered only if the underlying asset's price falls below a certain level. The latter type of option is triggered only after an underlying asset's price rises to a certain level. Understanding Knock-In Options ------------------------------ Knock-in options are one of the two main types of barrier options, with the other type being [knock-out options](https://www.investopedia.com/terms/k/knock-outoption.asp). A knock-in option is a type of contract that is not an option until a certain price is met. So if the price is never reached, it is as if the contract never existed. However, if the underlying asset reaches a specified barrier, the knock-in option comes into existence. The difference between a knock-in and knock-out option is that a knock-in option comes into existence only when the underlying security reaches a barrier, while a knock-out option ceases to exist when the underlying security reaches a barrier. Barrier options typically have cheaper [premiums](https://www.investopedia.com/terms/p/premium.asp) than traditional [vanilla options](https://www.investopedia.com/terms/v/vanillaoption.asp), primarily because the barrier increases the chances of the option expiring worthless. A trader may choose the cheaper (relative to a comparable vanilla) barrier option if they feel it is quite likely the underlying will hit the barrier. Image by Sabrina Jiang © Investopedia 2020  Down-and-In Knock-In Option --------------------------- Assume an investor purchases a down-and-in [put option](https://www.investopedia.com/terms/p/putoption.asp) with a barrier price of $90 and a [strike price](https://www.investopedia.com/terms/s/strikeprice.asp) of $100. The underlying security is trading at $110, and the option [expires](https://www.investopedia.com/terms/e/expirationdate.asp) in three months. If the price of the underlying security reaches $90, the option comes into existence and becomes a vanilla option with a strike price of $100. Thereafter, the holder of the option has the right to sell the underlying asset at the strike price of $100, even though it is trading below $90. It is this right that gives the option value. The put option remains active until the expiration date, even if the underlying security rebounds back above $90. However, if the underlying asset does not fall below the barrier price during the life of the contract, the down-and-in option expires worthless. Just because the barrier is reached does not assure a profit on the trade since the underlying would need to stay below $100 (after triggering the barrier) in order for the option to have value. Up-and-In Knock-In Option ------------------------- Contrary to a down-and-in option, an up-and-in option comes into existence only if the underlying reaches a barrier price that is above the current underlying's price. For example, assume a trader purchases a one-month up-and-in [call option](https://www.investopedia.com/terms/c/calloption.asp) on an underlying asset when it is trading at $40 per share. The up-and-in call option contract has a strike price of $50 and a barrier of $55. If the underlying asset does not reach $55 during the life of the option contract, it expires worthless. However, if the underlying asset rises to $55 or above, the call option would come into existence and the trader would be [in the money](https://www.investopedia.com/terms/i/inthemoney.asp). --- *Originally published on [Allson](https://paragraph.com/@allson/knock-in-option)*