Kick in and Knock out Options
Kick In and Knock Out Options are options that have an embedded price level or trigger event which, if the level is attained or the trigger event occurs, results in an option or eliminates the existence of a vanilla option.
With Kick In Options, the buyer starts out with a contingent vanilla option. If the kick-in level is ever reached during the life of the contract, it results in a vanilla option with a predetermined maturity date and strike price. If the kick-in event does not occur, the vanilla option does not come into existence.
With Knock Out Options, the buyer begins with a vanilla option. If the spot rate reaches a predetermined level at any time during the term of the option, the vanilla option is cancelled.
Kick In and Knock Out Options enable you to express a directional view about where a currency may be headed for a reduced upfront premium, relative to a standard vanilla option. They are also used in structured option products, commonly in zero premium structures.
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