Barrier options

Barrier options are options where the payoff depends on whether the underlying asset’s price reaches a certain level during a certain period of time. There are two types of barrier options: knock-out options and knock-in options. A knock-out option ceases to exist when the underlying asset price reaches a certain barrier; a knock-in option comes into existence only when the underlying asset price reaches a barrier.

Example of a barrier knock-in call

Today is 19th October 2022.
Bitcoin price is USD 19'000.
 
Bob thinks Bitcoin is ready to jump to new levels, and he is looking for the cheapest instrument with unlimited upside without the risk of a margin call.
 
He buys 10 BTCUSD 19'000 call knocking-in at 22'000 25.11.2022 for USD 450 each, thus paying a total premium of USD 4'500. This is the maximum he could lose. Bob will receive a call option payoff only if the price is above the barrier on the expiry date.
 
Bob proved to be right, and the Bitcoin went up a lot from the entry point. The Bitcoin passed the barrier (22'000), and the price at expiry (25.11.2022) is USD 23'100.
 
His profit on each contract at expiry is, therefore, USD (23'100 — 19'000) = USD 4'100 (difference between strikes). And the overall position has given x 10 = USD 41'000.
 
Given the premium paid, his net PnL is USD 41'000 — USD 4'500 = USD 36'500
 

Example of a barrier knock-in put

Today is 19th October 2022.
Bitcoin price is USD 19'000.
 
Bob is very negative on the market in the next three months, and he is
looking for the cheapest hedge without upside risk.
 
He buys 10 BTCUSD 19'000 put knocking-in at 16'000 30.12.2022 for USD 620 each, thus paying a total premium of USD 6'200. This is the maximum he could lose. Bob will receive a put option payoff only if the price is below the barrier on the expiry date.
 
Bob proves to be right, and the price at expiry (30.12.2022) is USD 11'200 (below the barrier).
 
Therefore, his profit on each contract at expiry is USD (19'000 — 11'200) = USD 7'800. And the overall position has given x 10 = USD 78'000.
 
Given the premium paid, his net PnL is USD 78'000 — USD 6'200 = USD 71'800

Option typeEuropean Knock-in Put, European Knock-in Call
UnderlyingPhinom BTH index, Phinom ETH index
Quote currencyUSDC
StrikeUnderlying price set in contract
BarrierUnderlying price set in contract
Expiry8:00 UTC of the Expiry date specified in contract
Expiry spotAverage of the Underlying price over the last 30 minutes before the Expiry
Quote periodAny date before 24h from Expiry
SettlementCash settled
Minimum price tick size0.01
Mininum contract sizeBTC0.1
ETH0.1
Early terminationAvailable, at unwind price
Payoff amountEuropean Knock-in CallExpiry spot > BarrierContract_size * Min(Expiry Spot - Strike, 0)
Expiry spot < Barrier0
European Knock-in PutExpiry spot < BarrierContract_size * Min(Strike - Expiry Spot, 0)
Expiry spot > Barrier0

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