What is an Up-and-In Option
Up and in options are a type of barrier option that can only be exercised when the price of the underlying asset reaches a set barrier level. Up and in is one common type of knock in barrier option.
BREAKING DOWN Up-and-In Option
Up and in options are a type of exotic option known as a barrier option. As an exotic option, barrier options are structured with more complex terms than standard plain vanilla options. Barrier options can be of two varieties, either a knock in option or a knock out option. Barrier options may also include a rebate provision for the holder if the option is not exercisable.
Knock In Options
Knock in options can be either up and in or down and in. These options include a barrier price that when crossed make the option available for exercise. In an up and in option the holder will have the right to exercise when the barrier price level is reached or exceeded, depending on the structuring. In a down and in option the holder gets the right to exercise when the underlying asset’s price falls to or below a certain barrier level.
All types of barrier options can be structured with either puts or calls. An up and in call option allows an investor to benefit when a price is rising. A down and in put option allows an investor to benefit when a price is falling.
Knock Out Options
Knock out options are the opposite of knock in options. These products make the option defective when a price is reached. Knock out options can be either up and out or down and out. In an up and out option the product becomes defective when a price is reached or exceeded. In a down and out option the product becomes defective when a price falls to or below its barrier level.
Rebate Barrier Options
Both knock in and knock out options can include a rebate provision. These options will be known as rebate barrier options. In a rebate barrier option the holder receives a rebate when the option is non-exercisable at expiration.
Barrier Option Provisions
Barrier options can be structured in various ways. These options are American options with a flexible exercise date. Some options may become effective or defective when a specific barrier price is reached while others require the security’s value to move through the price before their provisions are enacted.
Barrier options can also include modified touch provisions. Some barrier options may include one touch while others require multiple touches. Barrier options can also be structured to include provisions for two or more barriers.