Barrier Level
A predetermined price level in barrier options that, when reached, activates or cancels the option contract.
A barrier level is a price point built into a barrier option that activates or kills the contract when touched. Barrier options are cheaper than standard options because of that condition.
A barrier level is a specific price point built into a barrier option contract. When the underlying asset reaches this level, it either activates the option (knock-in) or terminates it (knock-out). Barrier options are cheaper than standard options because the barrier condition reduces the probability of payout. In forex, large barrier option levels can attract or repel spot prices as dealers hedge their exposure.
How It Works
- Knock-in: the option only becomes active if the barrier level is reached
- Knock-out: the option is cancelled if the barrier level is touched
- Barrier levels at round numbers (1.1000, 150.00) often create visible price behaviour in spot markets
- Option dealers hedge near barrier levels, which can cause price to stall or accelerate through
Trading Tips
Large barrier option levels reported in the market can act as support or resistance in spot forex
Price may be "defended" near a knock-out barrier by the option holder hedging against a breach
Once a barrier is broken, the hedging activity unwinds and price can accelerate sharply
Related Terms
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