A variation on a barrier option in which the barrier is in-the-money, lying between the strike price and the underlying spot price. The premium of this option is particularly sensitive to movements in the barrier’s direction. Therefore, a geared barrier option can be instrumental to investors with high volatility and/ or directional views, and premium constraints.

Like options in general, this option can be used in currency markets. For example, suppose an investor believes the dollar will appreciate against the euro, with little possibility of downward movement. The investor buys euro, 3 month 1.2045 USD call/ euro put with a “reverse knock out” at 1.3030 for a given premium.

Characteristically, geared barrier options have positive intrinsic values at the barrier.