What are Knockout Options?
Knockout Options are a limited-risk way to trade FX, indices and commodities, with a unique feature where the price moves one-for-one with the underlying City Index price. The key features of a Knockout Option are:
Flexible margin and lower risk
By choosing your own Knockout Level and trade size, you determine the margin requirement and maximum risk on the trade. A trade will automatically close (get ‘knocked out’) if the City Index underlying market price reaches your chosen level.
Move one-for-one with underlying market
Knockout Options have a unique feature whereby the price moves one-for-one with the underlying City Index price. For every point the underlying market moves, the price of the Knockout Option moves by the same amount.
Buy to open
You must buy to open a Knockout Option position. You can long the underlying market by buying an UP KO, or short the underlying market by buying a DOWN KO. If the market moves in your chosen direction you will make a profit; if it moves against you, you will make a loss.
Knockout Options have an expiry, which is stated in the market name e.g. Wall Street Feb UP KO (this indicates the Knockout Option expires on the last trading day of February 2022). You can close your position at any time before expiry (unless your Knockout Level is triggered).
Knockout Option trade example
In this Knockout Option trade example, you believe the Wall Street futures market price is going to rise, so you buy a Wall Street Feb 22 UP KO with an underlying Ask Price of 34025.5.
You place the buy position to buy 5 contracts of the Wall Street Feb 22 UP Knockout Level of 33925.5.
The opening price of the Knockout Option is therefore 100 – i.e. the distance between the price of the underlying market at the time of placing the trade and the Knockout Level.
The margin is calculated as follows:
Knockout Option opening price x Trade Size
In this example, your margin requirement for Wall Street Feb 22 UP KO would be: 100 x $5 = $500.
Your Maximum Risk is the Knockout Option opening price multiplied by the size of the trade, and in this instance is $500 – you cannot lose more than this if the Knockout Level was reached, making it a limited-risk trade.
Wall Street moves in your favour by 50 points to 34075.5.
You choose to take profits by closing your position. Profit and loss for a Knockout Option trade is calculated as follows:
(Knockout Option closing price –Knockout Option opening price) x amount/point
In this scenario, the profit on your Wall Street Feb 22 UP KO would be:
(150 – 100) x $5/point = $250 profit
Compare Knockout Options
See how Knockout Options compare to a standard CFD trade with the example below, including margin requirement and maximum loss.
Market: Wall Street / Wall Street UP KO
Trade Size: Long 5 contracts at 34025.5
Scenario: Wall Street drops by 200 points to 33825.5. The Knockout Option and Guaranteed Stop trades close automatically at the specified level, whilst you would need to manually close the standard trade.
CFD trade (Guaranteed Stop Loss Order)
CFD Trade (No Stop)
|Knockout Level/Stop Level||33925.5||33925.5||NA|
|Knockout Price/Stop Distance||100||100||NA|
|Realised Loss||$500||$500 + $10 stop premium||$1000|
What are the costs involved?
Knockout Options costs are fully transparent and simple to understand. You will know the cost of each trade you place upfront, with no hidden fees or charges. We calculate the margin requirement based on your chosen Knockout Level and trade size, which covers the spread cost (including the protection of your guaranteed Knockout Level).
You can find out more about Knockout Option costs on the Market Information page and in the Market 360 tab on our Web Trader platform.