how an up and in option works
up and in options are a type of exotic option known as a barrier option as an exotic option barrier options are structured with more complex terms than standard plain vanilla options barrier options can be of two varieties either a knock in option or a knock out option the option pays out differently depending on the variety barrier options may also include a rebate provision for the holder if the option cannot be exercised because exotic options are often available in otc markets there is a fair amount of variation in how these options may be offered depending on the liquidity of the underlying which may be forex or stocks some options may be offered in a bespoke manner these kinds of options are also rarely available to most retail investors here is how the payouts vary between the two varieties knock in optionsknock in options can be either up and in or down and in this implies whether the price will rise or fall to meet the barrier price level the barrier price when crossed makes the option available for exercise an up and in option will give the holder the right to exercise when the barrier price level is reached or exceeded depending on the structuring in a down and in option the holder gets the right to exercise when the underlying asset s price falls to or below a certain barrier level barrier options are structured with either puts or calls an up and in call option allows an investor to benefit when a price is rising a down and in uses a put option and allows an investor to benefit when a price is falling knock out optionsknock out options are the opposite of knock in options these products make the option defective when a price is reached but viable so long as the barrier price is not reached knock out options can be either up and out or down and out with an up and out option the product becomes defective when a price is reached or exceeded and with a down and out option the product becomes defective when a price falls to or below its barrier level rebate barrier optionsboth knock in and knock out options can include a rebate provision these options will be known as rebate barrier options in a rebate barrier option the holder receives a rebate when the option is non exercisable at expiration barrier option provisionsbarrier options can be structured in various ways these options are american options with a flexible exercise date some options may become effective or defective when a specific barrier price is reached while others require the security s value to move through the price before their provisions are enacted barrier options can also include modified touch provisions some barrier options may include one touch while others require multiple touches barrier options can also be structured to include provisions for two or more barriers investopedia does not provide tax investment or financial services and advice the information is presented without consideration of the investment objectives risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors investing involves risk including the possible loss of principal 