Down-and-Out Option

A down-and-out option is like a normal option, except that it gets KO’d if the underlying security falls below a certain price level. Basically, it’s a mortal option. If the price of the underlying asset falls below the predetermined barrier, the option expires, yielding nothing for the investor...even if the asset rises to above the barrier price again.

Down-and-out options are a type of barrier option, which means something happens when the underlying security hits either an upper or lower price limit. Down-and-out options only have a lower price barrier (the other type of knock-out barrier option is the up-and-out option, which is same, except with an upper price barrier rather than a lower one).

Down-and-out options are more rare than they are common, so watch out unless you wanna be KO’d, if you know what we’re saying.