01 Jan 2001, Energy Risk glossary , Energy Risk
Barrier options are exotic options that either come to life (are ‘knocked-in’) or are extinguished (‘knocked-out’) under conditions stipulated in the option contract. The conditions are usually defined in terms of a price level (barrier, knock-out or knock-in price) that may be reached at any time during the lifetime of the option.
There are four major types of barrier options: up-and-out, up-and-in, down-and-out and down-and-in. The extinguishing or activating features of these options mean they are usually cheaper than ordinary options, making them attractive to buyers looking to avoid high premiums.