A knock-in Option is a type of exotic Option that becomes active only when the underlying asset reaches a specific price level known as the barrier. There are two types: up-and-in (activated when the price rises to the barrier) and down-and-in (activated when the price falls to the barrier). Until the barrier is breached, the Option remains dormant and holds no value. Knock-in Options are used to reduce premium costs and are typically part of complex hedging or speculative strategies. Traders must accurately forecast market movement and timing for these Options to become profitable.
Example:
An Option becomes active only if the underlying stock reaches a specified barrier price.
