Knockout Options FAQs

Learn all about trading Knockout Options, with information on the markets available, calculating profit and loss, and more.
Knockout Options
Knockout Options
  1. What is a Knockout Option?
  2. How do I trade a Knockout Option?
  3. What markets are available to trade Knockout Options?
  4. How do I open and close a Knockout Option position?
  5. What is the Knockout level?
  6. How do I change my Knockout level?
  7. What is the maximum risk?
  8. How much money do I need to trade Knockout Options?
  9. What platforms can Knockout Options be traded on?
  10. Where can I find Knockout Options in the platform?
  11. How do I determine the price of a Knockout Option?
  12. How is profit/loss calculated?
  13. What size position can I hold?
  14. Are Knockout Options subject to dividend adjustments?
  15. Do Knockout Option positions rollover?
  16. How long can I keep my position open?
  17. How are my positions settled in market expiry?
  18. How do I find out more detailed information about the knockout option market?
  19. What are the costs of trading Knockout Options?
  20. Can I trade Knockout Options on charts?
  21. Example trades - Long Knockout Option positions on Indices
  22. Example trades - Short Knockout Option positions on FX

What is a Knockout Option?

A Knockout Option is 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:

Flexibility: Select a Knockout Level when you trade and get the flexibility to choose your own margin and maximum risk.

Protection: The Knockout Level you choose is guaranteed, which ensures that your position is closed automatically at 0 if the underlying market reaches the Knockout Level. This means you always know your maximum risk when you place a trade.

Transparency: The Knockout Option price is displayed at the time you place the trade – there are no hidden fees or costs.

Expiry: Knockout Options have an expiry. The expiry month is stated in the name of the market e.g. USD/JPY Jan 22 UP KO (this indicates the Knockout Option expires on the last trading day of January 2022).

There are two types of Knockout Option - UP KO and DOWN KO.

UP KO: If you think the price of the underlying market will rise, you would buy an UP KO.

DOWN KO: If you think the price of the underlying market will fall, you would buy a DOWN KO.

How do I trade a Knockout Option?

You can find the list of available Knockout Option markets in our Web Trader platform and mobile trading app, available for iOS and Android.

Decide whether you want to buy an UP KO or a DOWN KO and select that market to open a deal ticket, then decide your Knockout Level and trade size before placing your trade.

To place a Knockout Option trade, you need to:

1. Choose to buy an UP KO or DOWN KO market

  • e.g. Wall Street Nov 22 UP KO if you think the market will rise
  • e.g. Wall Street Nov 22 DOWN KO if you think the market will fall

2. Set your Knockout Level

  • This is where your trade will automatically close if the underlying price is met
  • For an UP KO market, the Knockout Level will be below the City Index underlying ‘Ask’ price
  • For a DOWN KO market, the Knockout Level will be above the City Index underlying ‘Bid’ price

3. Check your Knockout Price

  • This is the distance between the price of the underlying market at the time of placing the trade and the Knockout Level
  • For an UP KO trade: City Index underlying ‘Ask’ price - Knockout Level
  • For a DOWN KO trade: Knockout Level - City Index underlying ‘Bid’ price

4. Set your trade size in Quantity

  • For FX this is the number of lots, where 1 lot = 10,000 units of the base currency of the underlying market
  • For indices and commodities, this the amount per point, denominated in the currency of the underlying market

5. Add an associated order (optional)

  • Choose a closing Stop or Limit Order to take profits automatically or manage risk

6. Check your required Premium

  • This is the total margin of your trade – the amount of available equity you need to open a position
  • It is calculated by multiplying the Knockout Option’s opening price by the size of the trade entered under ‘quantity’ – this figure is your Maximum Risk (the maximum amount you can lose on the trade, should the market move against you and your Knockout Level is reached)
  • This value changes on the deal ticket depending on what you enter. By adjusting your trade size and Knockout Level you will see that you can determine the margin of your trade

7. Check your percentage of available funds

  • This is the percentage of funds available in your account taken up by the margin contribution for your KO trade

8. Place your trade

  • Once you're happy with the details entered on the deal ticket, select 'Place Trade'

What markets are available to trade Knockout Options?

Knockout Options are available across a range of major FX, indices and commodities markets. You can view the full range of available markets here, or in our trading platform.

How do I open and close a Knockout Option position?

To open a position, you buy a Knockout Option. You can long the underlying market by buying an UP KO or short the underlying market by buying a DOWN KO.

You sell a Knockout Option to close an open position. You can use associated orders to attach a Stop/Limit to close any open position to take profits automatically or to manage risk.

What is the Knockout level?

The Knockout Level determines the value of your Knockout Option. The value of your Knockout Option is always the difference between the price of the underlying market and your Knockout Level. This ensures that your position is closed precisely when the price in the underlying market reaches your Knockout Level if a position moves against you.

You set your Knockout Level when opening a position. Each market has a minimum distance away from the underlying City Index price, which you will see on the deal ticket.

If your Knockout Level is reached, your position is immediately closed at 0 ensuring that any losses are limited to the amount you were willing to risk when opening the position.

How do I change my Knockout level?

Once a position is opened the Knockout Level cannot be changed. To manage risk, you can either attach a stop order to an open position or close it and re-open a new position with the desired Knockout Level.

What is the maximum risk?

Maximum Risk is the total amount you can lose on the trade, if the market moves against you and your Knockout Level is reached. You have the flexibility to set the Maximum Risk on a Knockout Options trade by choosing a Knockout Level and trade size when you place a trade.

How much money do I need to trade Knockout Options?

You have the flexibility to adjust the amount of equity on your account to suit your needs. The margin requirement – the minimum equity you must have in your account – is always equal to the total value of your Knockout position. In other words, it’s the difference between the Knockout Level and the price of the underlying market multiplied by your trade size in amount per point, which means it fluctuates with the Knockout Price.

What platforms can Knockout Options be traded on?

You can trade Knockout Options on our Web Trader desktop platform, and mobile app available on iOS and Android.

Please ensure that you have the latest version of the apps downloaded to your device.

Knockout Options are not available on our MetaTrader platforms.

Where can I find Knockout Options in the platform?

You can find the full list of available markets under the ‘Knockout Options’ section of the ‘Markets’ list, located on the ‘Browse Markets’ tab.

Alternatively, you can use the platform search bar and type in the Knockout Option market you are looking for, such as Wall Street Nov 22 UP KO.

How do I determine the price of a Knockout Option?

The price of a Knockout Option at any given time is the distance between the price of the underlying market and the Knockout Level. This means that they move in lockstep. For example, if the underlying price moves up one point, the price of the Knockout Option will move exactly the same amount. Once a Knockout Option trade is opened, the Knockout Price mirrors the price of the underlying asset.

  • For an UP KO trade: City Index underlying ‘Ask’ price - Knockout Level
  • For a DOWN KO trade: Knockout Level - City Index underlying ‘Bid’ price

How is profit/loss calculated?

The profit or loss on a Knockout Options trade is calculated by multiplying the difference between the opening level of the Knockout position and the closing price of the position by the trade size in amount/points

P&L = (Knockout Option closing price - Knockout Option opening price) x amount/points

What size position can I hold?

You can see the minimum and maximum size allowed on the Deal ticket, within the Market 360 tab on our platforms and on the Market Information page.

Are Knockout Options subject to dividend adjustments?

City Index will periodically apply dividend adjustments to Knockout Options Index positions, to take account of the ex-dividend adjustment to the underlying Index.

This ensures that there is no material impact to you, as, depending on the Knockout Option position you hold, City Index will either credit or debit your account for the dividends paid out on the underlying Index.

In the case of ‘UP KO’ index positions, the dividend adjustment will be credited to your account; in the case of ‘DOWN KO’ index positions, the dividend adjustment will be debited from your account.

This process follows the existing dividend adjustment process applied to our standard CFD markets.

Do Knockout Option positions rollover?

Knockout Option positions do not rollover. All Knockout Option positions are closed automatically in line with the settlement rules for each market.

How long can I keep my position open?

You can keep your Knockout Option position open until market expiry – visible in the market name – unless the Knockout Level is reached, at which point your position will automatically close at 0 or until closing orders are triggered.

How are my positions settled in market expiry?

If your position is still open at the time of the market expiry, we will automatically close the position at the mid-price of the underlying market and you will receive the profit or loss on that position.

For more detail on the time of market expiry please see the Market 360 tab on our platforms.

How do I find out more detailed information about the knockout option market?

You can see more detailed information about Knockout Options on the Market 360 tab on our platforms and on the Market Information page.

What are the costs of trading Knockout Options?

We charge a spread when opening a position which also covers the protection of the guaranteed Knockout Level.

As with standard cash CFD trades, Knockout Options positions on FX and index markets will also be subject to overnight financing charges on a daily basis. We use swap points to calculate the daily overnight financing adjustment amount for FX pairs. Financing on index markets uses (2.5% +/-) the underlying interbank rate and details can be found in the Market 360 tab in the trading platforms, or by visiting our costs of trading page.

Commodity Knockout Option markets will not be subject to overnight financing.

Can I trade Knockout Options on charts?

Yes, you can trade Knockout Options from the market chart.

Example trades - Long Knockout Option positions on Indices

You decide your Knockout Option strategy. Assume that Wall Street (City Index's equivalent price for the Dow Jones) is trading at a price of 29,025.5 and you believe that it is going to rise - you decide to buy a Wall Street Nov 22 UP KO. You Buy $5/point with a Knockout level of 28925.5.

The opening price of the Knockout Option is 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 X 1.1

In this example, your margin requirement for Wall Street Nov 22 UP KO would be:

100 x $5 x 1.1 = $550

Scenario 1 - Closing your trade with a profit

Wall Street moves in your favour by 50 points to 29,075.5 and your Wall Street Nov 22 UP KO position increases in value by exactly the same amount to a price of 150.

You choose to take the Knockout Option profit by selling your Wall Street Nov 22 UP KO. Profit and loss for a Knockout 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 Nov 22 UP KO would be:

(150 - 100) x $5/point = $250 profit

Scenario 2 - Closing your trade with a loss

Wall Street moves against you by 50 points to 28,975.5 and your Wall Street Nov 22 UP KO position decreases in value by exactly the same amount to a price of 50.

You decide to close the trade with a loss by selling your Wall Street Nov 22 UP KO. The loss on your trade would be:

(150 - 100) x $5/point = $250 loss

Scenario 3 - Your trade reaches the Knockout Level and is closed instantly

Wall Street moves against you by 200 points to 28,825.5 - below your Knockout Level - and your Wall Street Nov 20 UP KO position, moving in lockstep with the underlying market, decreases in value by exactly the same amount until it reaches 0.

As you set your Knockout Level to 28,925.5, your trade was automatically knocked out (closed) when the underlying market reached this price, meaning you didn't incur any additional losses beyond this point despite the market price continuing to decrease

In this scenario, the loss on your Wall Street Nov 20 UP KO would be:

(0 - 100) x $5/point = $500 loss

$500 is the Maximum Risk you determined when setting the Knockout Level and trade size when the position was opened. As you chose to trade Knockout Options, which are limited-risk, you ensured that you couldn't lose more than your chosen Maximum Risk amount.

Example trades - Short Knockout Option positions on FX

EUR/USD is trading at 1.1025 and you believe it is going to fall, so, you decide to buy the EUR/USD Nov 22 DOWN KO. You buy 5 lots (the equivalent to €50,000 of exposure, and a trade size of US$5/point) with a Knockout Level of 1.1325.

The opening price of the Knockout Option is 300 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 X 1.1 

In this example, your margin requirement for EUR/USD Nov 22 DOWN KO would be:

300 x $5 x 1.1 = $1,650

Scenario 1 - Closing your trade with a profit

EUR/USD moves in your favour and drops by 300 pips to 1.0725. Your EUR/USD Nov 22 DOWN KO position increases in value by exactly the same amount to a price of 600.

You choose to take the Knockout Option profit by selling 5 lots of the EUR/USD Nov 22 DOWN KO. The profit on your EUR/USD Nov 22 DOWN KO would be:

(600 - 300) x $5/point = $1500 profit

Scenario 2 - Closing your trade with a loss

EUR/USD moves against you and rises by 200 pips to 1.1225. Your EUR/USD Nov 22 DOWN KO position decreases in value by exactly the same amount to a price of 100.

You decide to close the trade with a loss by selling 5 lots of EUR/USD Nov 22 DOWN KO. The loss on your trade would be:

(100 - 300) x $5/point = $1000 loss