Trading Knockout Options

Trade CFDs with limited risk using Knockout options with City Index.

Key features

Knockout Options are a simple, innovative, limited-risk way to trade FX, indices and commodities. The key features of a Knockout Option are:

Higher leverage 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

Expiry

Knockout Options have an expiry, which is stated in the market name e.g. Wall Street Nov 22 UP KO (this indicates the Knockout Option expires on the last trading day of November 2022). You can close your position at any time before expiry (unless your Knockout Level is triggered).

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 i.e. the distance between the price of the underlying market at the time of placing the trade and the Knockout Level.

Graph illustrating Knockout 

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 if the Knockout Level was reached, 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. 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 Nov 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/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 Option

CFD trade
(Guaranteed Stop Loss Order)

CFD Trade
(No Stop)

Buy Price 100 34,025.5 34,025.5
Knockout Level/Stop Level 0 33,925.5 NA
Knockout Price/Stop Distance 100 100 NA
Maximum Risk $500  $500 $170,127.5
Margin Required $550 $550 $8,506.38
Closing Price 0 33,925.5 33,825.5
Realised Loss $500  $500 + $9 stop premium $1,000

What are the costs involved?

The costs of Knockout Options 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.

Try a demo account

Learn how to trade Knockout Options with a risk-free demo account.