What is a Knock-In Option?

A knock-in option is a latent option contract that only becomes active (or “knocks in”) after a certain price level is achieved prior to expiration. Knock-ins can be characterized as either a down-and-in or an up-and-in kind of barrier. A barrier option is a form of contract in which the payout is contingent on the price of the underlying security and whether it reaches a particular threshold.

It’s a derivative which only activates when a certain condition is met during the agreed observation period (which is usually the whole life of the option). Therefore, a knock-in call or put is only activated when a certain price condition is met during the observation window, else it disappears.

For example, a knock-in call or put on a stock at strike of, say, 12.00, would only activate if the knock-in price of the stock closed at 13.00 within the option life.