A knock-in option is a type of options contract that is not activated until a predetermined price is reached. The knock-in options contract is inactive until that price is reached. Knock-in options are one example of a barrier option: options contracts with earnings dependant on whether the underlying asset reaches a specific price level, referred to as the barrier price. In the case of a knock-in option, the barrier price must be achieved or surpassed before the option’s expiration in order to become active. There are two types of knock-in options:
- Down-and-in options, which are activated when the underlying asset’s price dips below the barrier price
- Up-and-in options, which are activated when the asset’s price rises above the barrier price
Example of a knock-in option
An investor buys long and purchases a put option for an asset trading at £50, with a strike price of £40, and a barrier price of £30. The asset price must reach £30 before the options contract expires for the investor to sell the underlying asset for the strike price of £40, even though it is trading at or below £30.