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A barrier option is a type of option contract that becomes active or inactive depending on the price of the underlying asset crossing a certain barrier level. Barrier options can be used for hedging against volatile market conditions to manage risk, or they can be used for speculative purposes for traders who want to take advantage of market movements crossing specific price points. This makes them appealing to traders in the forex, commodity, and equity markets.
A barrier option can have a knock-in or knock-out feature. A knock-in barrier option becomes active when the underlying asset price crosses the barrier level set in the contract, and the option starts behaving like a standard option. On the other hand, a knock-out barrier option becomes inactive and ceases to exist when the market price hits the barrier level.
Suppose an investor purchases a knock-out option on EUR/USD, setting the barrier level at 1.10.
If the EUR/USD exchange rate drops to or below 1.10 before the option’s expiry date, the option ‘knocks out’ or ceases to exist. In this case, the only thing the investor loses is the premium they paid to purchase the barrier option.
If the EUR/USD exchange rate remains above 1.10, the investor can exercise the option as though it is a standard option and profit from the difference between the strike price and the exchange rate.
ADSS offers a range of global markets for traders, with CFD opportunities in indices, commodities, forex, equities and more. We also feature tutorials, how-to guides, and weekly webinars to help you navigate the financial markets and find better trading opportunities. You can start trading and investing online by opening a live trading or demo trading account.
Investing in CFDs involves a high degree of risk that you will lose your money due to the use of leverage, particularly in fast moving markets, where a relatively small movement in the price can lead to a proportionately larger movement in the value of your investment. This can result in loses that exceed the funds in your account. You should consider whether you understand how CFDs work and you should seek independent advice if necessary.
ADS Securities LLC (“ADSS”) is authorised and regulated by the Securities and Commodities Authority (“SCA”) in the United Arab Emirates as a trading broker for Over the Counter (“OTC”) Derivatives contracts and foreign exchange spot markets. ADSS is a limited liability company incorporated under United Arab Emirates law. The company is registered with the Department of Economic Development of Abu Dhabi (No. 1190047) and has its principal place of business at 8th Floor, CI Tower, Corniche Road, P.O. Box 93894, Abu Dhabi, United Arab Emirates.
The information presented is not directed at residents of any particular country outside the United Arab Emirates and is not intended for distribution to, or use by, any person in any country where the distribution or use is contrary to local law or regulation.
ADSS is an execution only service provider and does not provide advice. ADSS may publish general market commentary from time to time. Where it does, the material published does not constitute advice, or a solicitation, or a recommendation to a transaction in any financial instrument. ADSS accepts no responsibility for any use of the content presented and any consequences of that use. No representation or warranty is given as to the completeness of this information. Anyone acting on the information provided does so at their own risk.
