Up-And-Out Option

AAA

DEFINITION of 'Up-And-Out Option'

A type of barrier option that becomes worthless if the price of the underlying asset increases beyond a specified price level (the "knock out" price). If the up-and-out option stays below the knock out price, then the holder may be entitled to a payout. Up-and-out options are considered to be exotic options and are not widely traded.

INVESTOPEDIA EXPLAINS 'Up-And-Out Option'

An up-and-out option would likely only be created through a direct agreement between large institutions or market markers better able to analyze and understand the risks involved. For example, it can be used by a portfolio manager as a less expensive method to hedge against losses on a short position. The hedge would be less expensive than buying a vanilla call option, but the hedge would be imperfect, since the buyer would be unprotected if the security price increased beyond the barrier price.

RELATED TERMS
  1. Barrier Option

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

    An option that can only be exercised when the price of the underlying ...
  3. Option

    A financial derivative that represents a contract sold by one ...
  4. Index Option

    A financial derivative that gives the holder the right, but not ...
  5. Exotic Option

    An option that differs from common American or European options ...
  6. Strike Width

    The difference between the strike price of an option and the ...
RELATED FAQS
  1. 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, ... Read Full Answer >>
  2. What are the main risks associated with trading derivatives?

    The primary risks associated with trading derivatives are market, counterparty, liquidity and interconnection risks. Derivatives ... Read Full Answer >>
  3. How can an investor profit from a fall in the utilities sector?

    The utilities sector exhibits a high degree of stability compared to the broader market. This makes it best-suited for buy-and-hold ... Read Full Answer >>
  4. What is the difference between derivatives and options?

    Options are one category of derivatives. Other types of derivatives include futures contracts, swaps and forward contracts. ... Read Full Answer >>
  5. How are rights distributed in a rights offering?

    In a rights offering, rights are distributed to shareholders based on the number of shares they already own. What Is a Rights ... Read Full Answer >>
  6. What risks should I consider taking a short put position?

    The risks to consider before taking a short put position are the odds of sustained weakness in the asset price and a spike ... Read Full Answer >>
Related Articles
  1. Options & Futures

    Introduction To Single Stock Futures

    These contracts allow for easier shorting, and provide more leverage and flexibility than stocks.
  2. Options & Futures

    Exotic Options: A Getaway From Ordinary Trading

    Exotic options are like regular options, except that they have unique features that make them complex. These unusual investment vehicles can reignite your interest in trading.
  3. Options & Futures

    Naked Call Writing: A Risky Options Strategy

    Learn about this aggressive trading strategy to generate income as part of a diversified portfolio.
  4. Options & Futures

    Options Trading With The Iron Condor

    This options strategy allows your profits to soar in a sideways market.
  5. Options & Futures

    Using Options Instead Of Equity

    Learn how to multiply returns and diversify risk by buying options instead of stock.
  6. Options & Futures

    Options Trading Strategies: Understanding Position Delta

    Learn more about the position delta hedge ratio and how it can tell you the number of contracts needed to hedge a position in the underlying asset.
  7. Options & Futures

    Ratio Writing: A High-Volatility Options Strategy

    Selling a greater number of options than you buy profits from a decline back to average levels of implied volatility.
  8. Options & Futures

    The History Of Options Contracts

    Options and futures didn't originate with Wall Street power brokers. In fact, it all started with rice.
  9. Investing Basics

    Explaining Gamma

    Gamma is a measurement of how fast the delta of an option’s price changes after a 1-point movement in the underlying security.
  10. Economics

    Will the Selloff in China Hurt the Global Economy?

    Though China is the world’s second largest economy, its volatility in the stock market is unlikely to have an impact on the global or Chinese economy.

You May Also Like

Hot Definitions
  1. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
  2. Unfair Claims Practice

    The improper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims ...
  3. Killer Bees

    An individual or firm that helps a company fend off a takeover attempt. A killer bee uses defensive strategies to keep an ...
  4. Sin Tax

    A state-sponsored tax that is added to products or services that are seen as vices, such as alcohol, tobacco and gambling. ...
  5. Grandfathered Activities

    Nonbank activities, some of which would normally not be permissible for bank holding companies and foreign banks in the United ...
  6. Touchline

    The highest price that a buyer of a particular security is willing to pay and the lowest price at which a seller is willing ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!