Barrier Options

Barrier options

Option contracts that remain dormant until a trigger point (the barrier price) is reached, at which point the call or put option is activated, and results either in a long or short options position, or in the automatic exercise of an options position. One example is an up-and-in call. Assume an exercise price of $50 and a barrier price of $53. If the stock stays below $53, the call option cannot be exercised. If the stock price reaches the $53 barrier price, the holder then has a call option on the shares at $50. These are exotic options.

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Barrier Option

An option contract that may only be exercised when the underlying asset reaches some barrier price. A barrier option may either be a knock-in or a knock-out. A knock-in may only be exercised when the underlying asset rises above or falls below (depending on the particular terms) the barrier price. On the other hand, a knock-out automatically expires when the underlying asset rises above or falls below the barrier price. It is important to note that the barrier price is distinct from the exercise price, though, theoretically, they may be set at the same amount. See also: Exotic option.