A barrier option is an option whose payoff is conditional upon the underlying asset's price breaching a barrier level during the option's lifetime. Types Barrier options are path-dependent exotics that are similar in some ways to ordinary options. You can call or put in American, Bermudan, or European exercise style. But they become activated (or extinguished) only if the underlying breaches a predetermined level (the barrier). "In" options only become active in the event that a predetermined knock-in barrier price is breached: If the barrier price is far from being breached, the knock-in option will be worth slightly more than zero. If the barrier price is close to being breached, the knock-in option will be worth slightly less than the corresponding vanilla option. If the barrier price has been breached, the knock-in option will trade at the exact same value as the corresponding vanilla option. "Out" options start their lives active and become null and void in the event that a certain knock-out barrier price is breached: If the barrier price is far from being breached, the knock-out option will be slightly less than the corresponding vanilla option. If the barrier price is close to being breached, the knock-out option will be worth slightly more than zero. If the barrier price has been breached, the knock-out option will trade at the exact value of zero. Some variants of "Out" options compensate the owner for the knock-out by paying a cash fraction of the premium at the time of the breach. The four main types of barrier options are: Up-and-out: spot price starts below the barrier level and has to move up for the option to be knocked out. Down-and-out: spot price starts above the barrier level and has to move down for the option to become null and void. Up-and-in: spot price starts below the barrier level and has to move up for the option to become activated. Down-and-in: spot price starts above the barrier level and has to move down for the option to become activated. For example, a European call option may be written on an underlying with spot price of $100 and a knockout barrier of $120. This option behaves in every way like a vanilla European call, except if the spot price ever moves above $120, the option "knocks out" and the contract is null and void. Note that the option does not reactivate if the