- Why trade Knockout Options?
- Knockouts vs CFDs
- How to start trading Knockout Options
- Understand the basics of Knockouts
- Research the markets
- Get ready to open your first position
- Monitor and close your trade
Why trade Knockout Options?
Trading Knockout Options gives you a way to trade FX, indices and commodities with limited risk.
You could think of Knockouts in a similar way to CFDs, in that you can speculate on rising and falling prices. But KOs close automatically if the market moves against you by a certain amount. So, they’re more akin to a CFD trade with a guaranteed stop-loss attached, without the premium to pay.
Knockout Options vs CFDs
See how Knockout Options compare to a standard CFD trade and a CFD with a guaranteed stop-loss with the example below, including margin requirement and maximum loss.
Market: Wall Street / Wall Street UP KO
Trade size: Long $5/point at 34,025.5
Scenario: Wall Street drops by 200 points to 33,825.5. The Knockout Option and guaranteed stop-loss order trades close automatically at the specified level, whilst you would need to manually close the standard trade.
|Knockout Level/Stop Level||0||33,925.5||NA|
|Knockout Price/Stop Distance||100||100||NA|
|Realised Loss||$500||$500 + $9 stop premium||$1,000|
How to start trading Knockout Options
You can trade Knockout Options online via contracts for difference (CFDs). You’ll never actually take ownership of, or sell, the underlying asset at the end of the contract. Instead, your profit and loss will always be settled in cash.
Get started trading Knockouts with City Index in just four steps:
- Understand the basics of Knockout Options
- Research the markets
- Get ready to open your first Knockout position
- Execute, monitor and close your position
1. Understand the basics of Knockout Options
Knockout Options are options contracts that automatically close if the underlying price reaches your chosen Knockout level. But otherwise, they work in much the same way as an options contract , in that they give you the right to buy or sell an asset at a set price – known as the strike price – on or before a set expiry date.
Learn more about what Knockout Options are and how they work
With City Index, you won’t be entering into the options contract, but rather speculating on its price. Our Knockout Options move one-for-one with the underlying market. So, for every point the market’s price moves, the price of the City Index Knockout moves the same amount.
Instead of your profit or loss being determined by how far beyond the strike price the market moves, it’s determined by the difference between the point at which you opened your Knockout Option position and when you close it. If the price rises by 10 points, you’d have 10 points of profit, but if the price fell by 10 points, you’d have 10 points of loss.
2. Research the markets
You can trade Knockout Options on a range of underlying asset classes, including currencies, commodities and indices. With City Index, our Knockout Options markets include:
- US Crude Oil
- Wall Street (Dow Jones)
- US Tech 100 (NASDAQ)
- Singapore Index
View our full range of KOs on our Knockout market information page
Whichever Knockout market you choose, you’ll need to make sure you’ve done your research and know what could impact the market price.
For example, forex pairs are impacted by economic data, political news and central bank announcements; commodity prices are driven by manufacturing outputs, supply chains, and economic expansion; and indices are impacted by the share prices of their constituents.
Learn more about each market in the City Index Academy
3. Get ready to open your first Knockout position
When you’re opening your position, you’ll need to fill out a deal ticket. In order to do so, you’ll need to know:
- Whether you’re bullish or bearish
- What Knockout level you’re setting
The first decision you will have to make is whether you are buying an UP or DOWN Knockout – in other words, whether you’re bullish or bearish about the market price. This will all depend on your research and any technical indicators you’ve used.
If you believe that the market price is going to increase, you’d buy an UP KO, which would have a Knockout level below the current market price – this way if the price falls instead, your position is closed at the predetermined level.
Alternatively, if you believe that the market price is going to decrease, you’d buy a DOWN KO, with a Knockout level above the current market value. So, if the price increases too much, your trade is ‘knocked out’.
Knockout Option costs
At this point, you’ll also be able to see the cost of your Knockout – which 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 this is calculated as the City Index underlying ‘buy’ price minus the Knockout level
- For a DOWN KO trade this is calculated as the Knockout level minus the City Index underlying ‘sell’ price
Before you trade, it’s also important to understand what costs you’ll incur. Our Knockout Options pricing is fully transparent and simple to understand. You’ll 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).
Don’t have an account? Learn how to use our platform and trade Knockout Options with a risk-free demo account.
4. Monitor and close your Knockout Option
Even though your Knockout Option will close if the market turns against you, you’ll still need to keep an eye on your open positions. That’s especially true if the price is moving in your favour, and the strike price is met – meaning you can close out for a profit. You can choose to add a limit order to your position to take profits automatically too.
However, monitoring your trades doesn’t have to mean you’re always glued to a computer. With City Index, you can set up automated alerts that tell you when your markets are moving, and even watch your positions on the go with our trading apps.
If your Knockout level isn’t hit, you can exit a Knockout position on or before the date of expiry. It all depends on whether your strike price has been met and how much profit you’ve generated. When you’re ready to exit your position, you’d simply hit ‘close’.
Ready to get started? Explore our full range of Knockout Options markets with a City Index account.
Example of a Knockout Option trade
You believe the Wall Street market price is going to rise, so you buy a Wall Street Nov 22 UP KO with an underlying Ask Price of 34,025.5.
You place the buy position at $5 per point with a Knockout Level of 33,925.5.
The opening price of the Knockout Option is therefore 100 which is 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.
The 1.1 multiplier ensures we comply with regulations.
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 making it a limited-risk trade.
Wall Street moves in your favour by 50 points to 34,075.5.
You choose to take profits by closing your position. So, your profit for the 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
Knockout Options FAQs
What are Knockout derivatives?
Knockout derivatives are a type of options position that is automatically closed – or knocked out – if the underlying price reaches your knockout level. It’s classed as a derivative as you’re not buying or selling the asset itself, but speculating on a market based on (or derived from) the value of the asset.
Can you trade Knockouts on stocks?
You can trade Knockouts on major global stock indices, which track the top shares on a given exchange. With City Index, you can trade Knockouts on the S&P 500 (US SP 500), Dow Jones (Wall Street), Strait Times Index (Singapore Index) and more.