# Knock-In Option By [trdhfk](https://paragraph.com/@trdhfk) · 2022-06-14 --- 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). Learn the Basics of Trading and Investing Looking to learn more about trading and investing? No matter your learning style, there are more than enough [courses to get you started.](https://adclick.g.doubleclick.net/pcs/click?xai=AKAOjstBtfgvITiGDZHN56e9Tb7PXUlSVBJLp4_l38emfw-0BC8gGre0eP9we47ki4_NXyivWCT9zwomZP8ThxJy-MzMOsY1ulu1MujanGnQCc_f1WnNK3pS9CpTZfuvUU6NnWp8bc39Xpkag3HPqVe4ubdEC_lihRImGCvzuOxIUXbNO7t_orkJdem-M7h7bq6rXgKHmgeovhF54pa5WdsI6TWyPGSs4CZPhRGJHr3Ub_uj4AINMVoxY4_x5NRju3DJ0g9SbemjwmwgwXbmWV3o2fptn8-t7rR28OyILPyxBSzdwsNYsZ8y7RuZ_NUmsseejN_UQpUietV1vrxX0tkF5mgloqMBEu_6l-a7UTX3FC3MgQ&sig=Cg0ArKJSzFBG6taeSGZ5EAE&fbs_aeid=%5Bgw_fbsaeid%5D&urlfix=1&adurl=https://click.linksynergy.com/deeplink?id=RL7M2q*4kuk&mid=39197&murl=http%3A%2F%2Fwww.udemy.com%2Fcourses%2Ffinance-and-accounting%2Finvesting-and-trading%2F) With Udemy, you’ll be able to [choose courses taught by real-world experts](https://adclick.g.doubleclick.net/pcs/click?xai=AKAOjstBtfgvITiGDZHN56e9Tb7PXUlSVBJLp4_l38emfw-0BC8gGre0eP9we47ki4_NXyivWCT9zwomZP8ThxJy-MzMOsY1ulu1MujanGnQCc_f1WnNK3pS9CpTZfuvUU6NnWp8bc39Xpkag3HPqVe4ubdEC_lihRImGCvzuOxIUXbNO7t_orkJdem-M7h7bq6rXgKHmgeovhF54pa5WdsI6TWyPGSs4CZPhRGJHr3Ub_uj4AINMVoxY4_x5NRju3DJ0g9SbemjwmwgwXbmWV3o2fptn8-t7rR28OyILPyxBSzdwsNYsZ8y7RuZ_NUmsseejN_UQpUietV1vrxX0tkF5mgloqMBEu_6l-a7UTX3FC3MgQ&sig=Cg0ArKJSzFBG6taeSGZ5EAE&fbs_aeid=%5Bgw_fbsaeid%5D&urlfix=1&adurl=https://click.linksynergy.com/deeplink?id=RL7M2q*4kuk&mid=39197&murl=http%3A%2F%2Fwww.udemy.com%2Fcourses%2Ffinance-and-accounting%2Finvesting-and-trading%2F) and learn at your own pace, with [lifetime access on mobile and desktop.](https://adclick.g.doubleclick.net/pcs/click?xai=AKAOjstBtfgvITiGDZHN56e9Tb7PXUlSVBJLp4_l38emfw-0BC8gGre0eP9we47ki4_NXyivWCT9zwomZP8ThxJy-MzMOsY1ulu1MujanGnQCc_f1WnNK3pS9CpTZfuvUU6NnWp8bc39Xpkag3HPqVe4ubdEC_lihRImGCvzuOxIUXbNO7t_orkJdem-M7h7bq6rXgKHmgeovhF54pa5WdsI6TWyPGSs4CZPhRGJHr3Ub_uj4AINMVoxY4_x5NRju3DJ0g9SbemjwmwgwXbmWV3o2fptn8-t7rR28OyILPyxBSzdwsNYsZ8y7RuZ_NUmsseejN_UQpUietV1vrxX0tkF5mgloqMBEu_6l-a7UTX3FC3MgQ&sig=Cg0ArKJSzFBG6taeSGZ5EAE&fbs_aeid=%5Bgw_fbsaeid%5D&urlfix=1&adurl=https://click.linksynergy.com/deeplink?id=RL7M2q*4kuk&mid=39197&murl=http%3A%2F%2Fwww.udemy.com%2Fcourses%2Ffinance-and-accounting%2Finvesting-and-trading%2F) You’ll also be able to master the basics of day trading, option spreads, and more. Find out more about Udemy and [get started today.](https://adclick.g.doubleclick.net/pcs/click?xai=AKAOjstBtfgvITiGDZHN56e9Tb7PXUlSVBJLp4_l38emfw-0BC8gGre0eP9we47ki4_NXyivWCT9zwomZP8ThxJy-MzMOsY1ulu1MujanGnQCc_f1WnNK3pS9CpTZfuvUU6NnWp8bc39Xpkag3HPqVe4ubdEC_lihRImGCvzuOxIUXbNO7t_orkJdem-M7h7bq6rXgKHmgeovhF54pa5WdsI6TWyPGSs4CZPhRGJHr3Ub_uj4AINMVoxY4_x5NRju3DJ0g9SbemjwmwgwXbmWV3o2fptn8-t7rR28OyILPyxBSzdwsNYsZ8y7RuZ_NUmsseejN_UQpUietV1vrxX0tkF5mgloqMBEu_6l-a7UTX3FC3MgQ&sig=Cg0ArKJSzFBG6taeSGZ5EAE&fbs_aeid=%5Bgw_fbsaeid%5D&urlfix=1&adurl=https://click.linksynergy.com/deeplink?id=RL7M2q*4kuk&mid=39197&murl=http%3A%2F%2Fwww.udemy.com%2Fcourses%2Ffinance-and-accounting%2Finvesting-and-trading%2F) --- *Originally published on [trdhfk](https://paragraph.com/@trdhfk/knock-in-option)*