Down-and-Out Option

DEFINITION of 'Down-and-Out Option'

A type of knock-out barrier option that ceases to exist when the price of the underlying security hits a specific barrier price level. If the price of the underlying does not reach the barrier level, the investor has the right to exercise their European call or put option at the exercise price specified in the contract.

BREAKING DOWN 'Down-and-Out Option'

For example, a down-and-out option has a strike price of 100 and a knock-out price of 80. At the option's inception the price of the stock was 95 but before the option was exercisable the price of the stock hit 80, this means the option automatically expires worthless even if the underlying hits 100 before the exercise date.

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