Down-and-In Option

AAA

DEFINITION of 'Down-and-In Option'

A form of barrier option that becomes activated only if the price of the underlying asset falls below a pre-determined barrier price level during the life of the option. In a down-and-in option, the barrier level is set at some level below the current spot or prevailing price of the underlying asset. If the asset price falls below the barrier level, it becomes activated and has value; if the asset price does not fall below the barrier level, the option expires worthless.


The opposite of a down-and-in option is a down-and-out option, which becomes null and void if the price falls below a certain barrier price. The biggest benefit of such barrier options is that premiums payable for them are cheaper than for plain-vanilla options.

INVESTOPEDIA EXPLAINS 'Down-and-In Option'

For example, consider a one-month down-and-in put option on a stock that is trading at $10, with a strike price of $9.50 and a barrier of $9. If the price of the stock falls below $9 before the one-month expiration of the option contract, the put option is activated and the buyer has the right to sell the stock at the strike price of $9. On the other hand, if the stock does not fall below the $9 barrier, the put option is not activated and will expire worthless.

RELATED TERMS
  1. Barrier Option

    A type of option whose payoff depends on whether or not the underlying ...
  2. Option

    A financial derivative that represents a contract sold by one ...
  3. European Option

    An option that can only be exercised at the end of its life, ...
  4. Vanilla Option

    A financial instrument that gives the holder the right, but not ...
  5. Knock-In Option

    A latent option contract that begins to function as a normal ...
  6. Exotic Option

    An option that differs from common American or European options ...
Related Articles
  1. Options & Futures

    Options Basics Tutorial

    Discover the world of options, from primary concepts to how options work and why you might use them.
  2. Options & Futures

    What do all of the letters in a stock option ticker symbol mean?

    The option ticker explains four main things about the option: the underlying stock, whether it is a call or a put option, the expiration month and the strike price. An option ticker is quoted ...
  3. Options & Futures

    What's the difference between a regular option and an exotic option?

    Before learning about exotic options, you should have a fairly good understanding of regular options. Both types of options share the idea of having the right to buy or sell an asset in the future, ...
  4. Options & Futures

    Options -- Accessing Stakes In Apple At Less Cost

    Finding Apple stock costly to trade? Here are multiple ways to trade it through low-cost Apple options.
  5. Options & Futures

    These Are The Top Brokerage Firms For Options Trading

    Trading options? Here is the list of the best brokerage firms for options trading, with features, functionality, and brokerage rates.
  6. Options & Futures

    What is a volatility smile?

    Discover what options traders mean when they refer to a "volatility smile," and learn why a volatility smile's existence perplexes many investors and analysts.
  7. Options & Futures

    Apple As An Example Of How a Protective Collar Works

    We define a protective collar, using Apple (AAPL) as an example. A protective collar is a combination of a covered call plus long put position.
  8. Options & Futures

    Apple As An Example Of How to Use a Bull Call Spread to Trade

    Here's how you can use a bull call spread to trade stocks.
  9. Options & Futures

    Is short selling ethical?

    Understand the concept and practice of short selling, and examine the ethical questions that some investors raise in regard to this practice.
  10. Options & Futures

    What kinds of restrictions does the SEC put on short selling?

    Learn about the rules and regulations on short selling enforced by the U.S. Securities and Exchange Commission, or SEC, including the uptick rule.

You May Also Like

Hot Definitions
  1. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
  2. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
  3. Federal Funds Rate

    The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution ...
  4. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  5. Break-Even Analysis

    An analysis to determine the point at which revenue received equals the costs associated with receiving the revenue. Break-even ...
  6. Key Performance Indicators - KPI

    A set of quantifiable measures that a company or industry uses to gauge or compare performance in terms of meeting their ...
Trading Center