A Knock-Out option is an exotic option, commonly used for commodities and currencies, which expires worthless if the underlying commodity or currency passes through a certain price level. |
For example, a knock-out option which is based on the value between the Yen and the Dollar will be rendered worthless if the dollar exchange rate against the yen falls to a certain pre-specified level.
The Knock-Out option is generally cheaper than normal options and allows buyers to take larger positions with less money.