A barrier option that is equipped with a knock-out barrier- a barrier that allows it to deactivate (knock out) immediately if the barrier price level (the price of the option’s underlying- also known as the strike knock out) is touched or breached. A knock-out barrier option comes into existence as a standard option, and will not change its nature unless the knock out mechanism is activated.

This option is usually purchased by a market participant who desires to hedge an exposure to the underlying asset but only up or down to a specific level.

The two basic types of a knock-out barrier option are: American knock-out barrier option and European knock-out barrier option.