have lower premiums
limit lossesgood for specific hedge risk management strategiesvulnerable in volatile marketslimit profitsexotic options often less accessible to investorsknock out options limit losses however as is often the case buffers on the downside also limit profits on the upside moreover the knock out feature is triggered even if the designated level is breached only briefly that can prove dangerous in volatile markets example of a knock out optionlet s say an investor is interested in company abc with a share price of 17 as of march 20 by may 2 it closed at 22 92 per share say our investor is bullish on the company but still cautious the investor may write a call option at 23 per share with a strike price of 33 and a knock out level of 43 this option only allows the option holder buyer to profit as the underlying stock moves up to 43 at which point the option expires worthless thus limiting the loss potential for the option writer seller 