One of the most popular tools for stock trading is binary options. As the name suggests, binary options offer the possibility of two results: either the trader receives a pay out or the trade fails and the trader receives nothing. There is no middle ground with binary options.
KIKO options are a specialised member of the binary options family. KIKO itself stands for Knock In and Knock Out options. They are always composed of a vanilla option and two barriers. One barrier is the Knock In for the trade option and the other barrier is the Knock Out.
What types of KIKO options are there?
Two types of KIKO options are generally made available by stock brokers to online traders: Knock Out until expiration and Knock Out until Knock In. The characteristics of both forms are explained below.
Knock Out until expiration
The Knock Out until expiration KIKO option is triggered once the Knock In (KI) barrier has been broken, that is to say exceeded, by the movement of a particular stock on the market. However, the opposite situation is activated, if the Knock Out (KO) barrier is touched before the trade expires. This occurs when the value of the underlying asset falls below or to the same level as the KO barrier. When this happens, the trade is deactivated and will then be ‘knocked out’ or cancelled. The trader will not receive a pay out.
However, if the trade is activated by the KI barrier being breached and the value of the underlying asset never reaches the KO barrier, the trader’s pay out is equal to the asset’s value at the time the trade expires.
A trader can use any combination of barriers as part of a KIKO option. These can be either regular or reverse in nature, for example, a reverse KO barrier could be used with a regular KI barrier. If the trader decides to place both barriers on the same side of the vanilla option, the KI barrier must be between the option and the KO barrier. Apart from this, the positioning of barriers is extremely flexible.
Knock Out until Knock In
In this type of KIKO option, the trade is dissolved, if the Knock Out barrier is hit first. There will be no pay out for the trader in this situation. On the other hand, if the value of the underlying asset breaches the Knock In barrier first, the Knock Out barrier is erased and the trader will receive a pay out that is of the same value as the vanilla option when the trade expires.
When creating a Knock Out until Knock In option, one of the barriers must be regular and the other must be reverse. The trader must also ensure that the vanilla option is always between the two barriers. Otherwise, the KIKO option will not be valid.
The barriers aspect of KIKO options means that they are often viewed by online stock traders as a means to minimize risk and maximize profits. As such, they can be a very valuable tool in a trader’s arsenal.