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. Multibank Holding Company

    A company that owns or controls two or more banks. Mutlibank ...
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, ...
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. Options & Futures

    Give Yourself More Options With Real Estate Options

    Real estate options have many benefits, including a smaller initial capital requirement.
  10. Options & Futures

    The Fancy Way To Diversify Your Portfolio: Precious Metal Options

    A guide with strategies on how to invest or trade in precious metals by using options.

You May Also Like

Hot Definitions
  1. Technical Skills

    1. The knowledge and abilities needed to accomplish mathematical, engineering, scientific or computer-related duties, as ...
  2. Prepaid Expense

    A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received ...
  3. Gordon Growth Model

    A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. ...
  4. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
  5. Law Of Supply

    A microeconomic law stating that, all other factors being equal, as the price of a good or service increases, the quantity ...
  6. Investment Grade

    A rating that indicates that a municipal or corporate bond has a relatively low risk of default. Bond rating firms, such ...
Trading Center