# What Is a Knock-In Option? Types and Examples Explained

![Trader on the floor of an exchange pointing to something on a monitor and explaining something to another person](https://www.investopedia.com/thmb/Em7s-SkfmPzJOI64AnQOXnyjiIc=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/GettyImages-2032897735-e25835cdd85f41f4963ea188cbf1fbe3.jpg)

*— Michael M. Santiago / Staff / Getty Images*

## What Is a Knock-In Option?

A knock-in option is a latent option contract that begins to function as a normal option ("knocks in") only once a certain price level is reached before expiration. Knock-ins are a type of [barrier option](https://www.investopedia.com/terms/b/barrieroption.asp) that are classified as either a [down-and-in](https://www.investopedia.com/terms/d/daio.asp) or an [up-and-in](https://www.investopedia.com/terms/u/up-and-inoption.asp). A barrier option is a type of contract in which the payoff depends on whether the underlying security's price hits a specific level within a given time.

### Key Takeaways

*   Knock-in options become active only when the underlying asset hits a specific barrier, making them a unique type of barrier option.
*   There are two main types of knock-in options: down-and-in and up-and-in. Down-and-in options activate if prices fall below a set level, while up-and-in options activate if prices rise above a set level.
*   Knock-in options often have lower premiums compared to traditional vanilla options due to the additional barrier condition, which increases the likelihood that the option might expire worthless.
*   If the underlying asset's price doesn't reach the specified barrier within the option's life, a knock-in option has no effect and expires as if it never existed.

## How Do Knock-In Options Work?

Knock-in options are one of the two main types of barrier options, with the other type being [knock-out options](https://www.investopedia.com/terms/k/knock-outoption.asp).

A knock-in option is a type of contract that is not an option until a certain price is met. If the price is never reached, the contract essentially does not exist. However, if the underlying asset reaches a specified barrier, the knock-in option comes into existence. A knock-in option activates if the underlying security hits a barrier, while a knock-out option ends when it does so.

Barrier options typically have cheaper [premiums](https://www.investopedia.com/terms/p/premium.asp) than traditional [vanilla options](https://www.investopedia.com/terms/v/vanillaoption.asp), primarily because the barrier increases the chances of the option expiring worthless. Traders might pick cheaper barrier options over vanilla ones if they believe the underlying will hit the barrier.

![Image](https://www.investopedia.com/thmb/odmofdZA-uRLXCtVDFSKpoY8EEI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_Knock_In_Option_Apr_2020-01-ea2e95a4d5af4c96aa23b7c3e185f498.jpg)

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## Exploring Down-and-In Knock-In Options

Assume an investor purchases a down-and-in [put option](https://www.investopedia.com/terms/p/putoption.asp) with a barrier price of $90 and a [strike price](https://www.investopedia.com/terms/s/strikeprice.asp) of $100. The underlying security is trading at $110, and the option [expires](https://www.investopedia.com/terms/e/expirationdate.asp) in three months. If the price of the underlying security reaches $90, the option comes into existence and becomes a vanilla option with a strike price of $100. Thereafter, the holder of the option has the right to sell the underlying asset at the strike price of $100, even though it is trading below $90. It is this right that gives the option value.

The put option stays active until expiration, even if the security rises above $90 after activation. However, if the underlying asset does not fall below the barrier price during the life of the contract, the down-and-in option expires worthless. A barrier being reached doesn't guarantee profit; the underlying must stay below $100 for the option to be valuable.

## Understanding Up-and-In Knock-In Options

Contrary to a down-and-in option, an up-and-in option comes into existence only if the underlying reaches a barrier price that is above the current underlying's price. For example, assume a trader purchases a one-month up-and-in [call option](https://www.investopedia.com/terms/c/calloption.asp) on an underlying asset when it is trading at $40 per share. The up-and-in call option contract has a strike price of $50 and a barrier of $55. If the underlying asset does not reach $55 during the life of the option contract, it expires worthless. However, if the underlying asset rises to $55 or above, the call option will come into existence, and the trader will be [in the money](https://www.investopedia.com/terms/i/inthemoney.asp).