Some Variations

With increased popularity of barrier options and growth of its market, some other features are being introduced to better meet investors' needs.

Rebates

It is fairly common that a KO barrier option pays a rebate on a KO event to compensate the investor for the loss of the option.

The rebate is typically a small amount and paid either immediately or deferred to the maturity.

Double Barrier

A double barrier option is another variation that has 2 barriers, typically one up barrier and the other a down barrier.

For example, an investors seeking high leverage would consider double KO barrier options if they believe changes in the underlying asset level would be within a narrow range. The double KO barrier option costs less than a single barrier option and thus provides more leverage.

Another popular variation of double barrier is the KI option with a KO barrier. The KI barrier option can be knocked out either before or after the option is knocked in. Again, this type of double barrier options provides more leverage than a single barrier option because it costs less than the single KI barrier option.

Discrete Barrier

The barrier specification varies from contract to contract.

Many barrier options have the continuous barrier or intraday barrier. This means that the barrier event can be triggered any time during intraday trading hours.

Some barrier options only allow the barrier event to be triggered by the end-of-day closing price --> discrete barrier.

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