what is a barrier option 
a barrier option is a type of derivative where the payoff depends on whether or not the underlying asset has reached or exceeded a predetermined price a barrier option can be a knock out meaning it expires worthless if the underlying exceeds a certain price limiting profits for the holder and limiting losses for the writer it can also be a knock in meaning it has no value until the underlying reaches a certain price barrier options are considered exotic options because they are more complex than basic american or european options barrier options are also considered a type of path dependent option because their value fluctuates as the underlying value changes during the option s contract term in other words a barrier option s payoff is based on the underlying asset s price path the option becomes worthless or may be activated upon the crossing of a price point barrier types of barrier optionsbarrier options are typically classified as either knock in or knock out a knock in option is a type of barrier option where the rights associated with that option only come into existence when the price of the underlying security reaches a specified barrier during the option s life once a barrier is knocked in or comes into existence the option remains in existence until it expires knock in options may be classified as up and in or down and in in an up and in barrier option the option only comes into existence if the price of the underlying asset rises above the pre specified barrier which is set above the underlying s initial price conversely a down and in barrier option only comes into existence when the underlying asset price moves below a pre determined barrier that is set below the underlying s initial price contrary to knock in barrier options knock out barrier options cease to exist if the underlying asset reaches a barrier during the life of the option knock out barrier options may be classified as up and out or down and out an up and out option ceases to exist when the underlying security moves above a barrier that is set above the underlying s initial price a down and out option ceases to exist when the underlying asset moves below a barrier that is set below the underlying s initial price if an underlying asset reaches the barrier at any time during the option s life the option is knocked out or terminated other types of barrier optionsother variants of the barrier options described above are possible here are three of them reasons to trade barrier optionsbecause barrier options have additional conditions built in they tend to have cheaper premiums than comparable options with no barriers therefore if a trader believes the barrier is unlikely to be reached then they may opt to buy a knock out option for example since it has a lower premium and the barrier condition is unlikely to affect them someone who wants to hedge a position but only if the price of the underlying reaches a specific level may opt to use knock in options the lower premium of the barrier option may make this more appealing than using non barrier american or european options examples of barrier optionshere are two examples of barrier options described above assume an investor purchases an up and in call option with a strike price of 60 and a barrier of 65 when the underlying stock is trading at 55 the option would not come into existence until the underlying stock price moved above 65 while the investor pays for the option and the potential that it could become valuable the option only becomes applicable if the underlying reaches 65 if it doesn t the option is never triggered and the option buyer loses what they paid for the option assume a trader purchased an up and out put option with a barrier of 25 and a strike price of 20 when the underlying security was trading at 18 the underlying security rises above 25 during the life of the option and therefore the option ceases to exist the option is now worthless even if it only touched 25 briefly and then dropped back below 