Form of derivative that gives the buyer the right, but not the obligation, to buy an underlying commodity, currency, or other position at a preset price. Unlike regular options, however, knock-out options expire worthless, or are "knocked out" if the underlying commodity or currency goes through a particular price level. For example, a knock-out option based on the value of the U.S. Dollar against the German mark gets knocked out if the dollar falls below a specified exchange rate against the mark. Regular options can have unlimited moves up or down. Knock-out options are much cheaper to buy than regular options, allowing buyers to take larger positions with less money than regular options. Knock-out options are frequently used by hedge funds and other speculators. Knock-in options are the same concept with the trigger on the other side of the price. See also Exotic Options.
