A contract for difference (CFD) trade on a knock-out option (KO option). The trade automatically closes – i.e., gets knocked out/ deactivates – if the underlying market price reaches the predefined knock-out level. This trade allows a market participant to define its knock-out level and trade size, and hence it allows full control over margin and risk.
A knock-out has a perfect positive correlation with the market: one-for-one movement with the underlying price, so that for every price level the underlying moves, the price of the knock-out follows suit.
The trade can be constructed with a bull or bear view. If a trader believes or has indications that the market price is on a rising trajectory, he/ she would buy a bull trade, setting a knock-out level below the initial market value. In the opposite scenario, if a trader believes that the market price is going to decrease, he/ she would buy a bear trade, defining a knock-out level above the initial market value.
For more information on knock-outs, see: knock-out trades: an example.
