As in the vanilla options, the option buyer has a right to buy or sell an underlying asset from a strike price level at the end of the pre defined expiry date. On the other hand, there is a contidion about the path of the underlying asset during the option period for the barrier option to be exercised. If the condition is not satisfied option buyer can not exercise the option even if at the end of the period strike price is in the money according to the spot price and option ends worthless. There are two conditions defined for the barrier options. One is “Knock In” condition and the other is “Knock Out” condition. If barriers are not defined as European (condition will be checked only at expiry date)  they are accepted as American. (condition will be checked for the whole period from trade date to expiry date). Since there is a condition for the option to be exercised, prices of the barrier options are cheaper than the vanilla options.

 Knock In:

 Knock In event shows that option is valid and the options buyer can exercise at the expiry date. Knock In Barrier Options are opened as invalid. There is a Knock In Level and when this level is reached anytime until expiration, option becomes valid. During the life of the option,

 If knock in level is hit anytime, the knock in barrier option becomes a vanilla option and priced as vanilla option.

 If knock in level is never hit, the knock in barrier option ends worthless. Knock In Barrier options can be priced by Derivative Engines Real Time Option Calculators.

Knock Out:

Knock Out event shows that option is invalid and the options buyer can exercise at the expiry date. Knock Out Barrier Options are opened as valid. There is a Knock Out Level and if this level is reached anytime until expiration, option becomes invalid. During the life of the option,

 If knock out level is hit anytime, the knock out barrier option becomes worthless.

 If knock out level is never hit, option becomes a vanilla option and priced as vanilla option. Knoc Out Barrier options can be priced by Derivative Engines Real Time Option Calculators.