knock-out option investment & finance definition

An option that will become worthless, or be knocked out, if the underlying investment, such as a commodity, currency, or stock, reaches a particular price level. An option gives the buyer the right, but not the obligation, to purchase a security at a specific time and price, or the right to sell a security at a specific time and price. A knock-out option contrasts with a regular option, which only becomes worthless on the day of expiration, if it hasn’t been exercised.