Barrier option
A barrier option is a type of financial contract where there is a specific price level (called a barrier) that the underlying asset must either cross or not cross before a certain date. Think of it like a playground game: you have to touch a certain part of the playground before the timer goes off to win.
For example, let's say you have a barrier option on Apple stock, and the barrier is set at $110. If the price of Apple stock goes above $110 before the option's expiration date, then the option is activated and your contract can either be exercised or expired. If the price doesn't hit $110, then the option expires as worthless.
There are four main types of barrier options: up-and-in, up-and-out, down-and-in, and down-and-out. Each one specifies whether the barrier is activated when the underlying asset's price increases or decreases, and whether it has to cross the barrier or stay within certain bounds.
Barrier options are used by traders and investors to manage risk and protect against losses. They can be more complex than other types of financial contracts, so it's important to fully understand what you're getting into before investing.
For example, let's say you have a barrier option on Apple stock, and the barrier is set at $110. If the price of Apple stock goes above $110 before the option's expiration date, then the option is activated and your contract can either be exercised or expired. If the price doesn't hit $110, then the option expires as worthless.
There are four main types of barrier options: up-and-in, up-and-out, down-and-in, and down-and-out. Each one specifies whether the barrier is activated when the underlying asset's price increases or decreases, and whether it has to cross the barrier or stay within certain bounds.
Barrier options are used by traders and investors to manage risk and protect against losses. They can be more complex than other types of financial contracts, so it's important to fully understand what you're getting into before investing.