Let’s look at a more detailed example of a knock-out trade.
Say the Germany 40 is trading at 10,000, and you think the price is set to rise.
You choose a ‘Call’ knock-out, and set your trade size in cash at €1,000. For the purposes of this example, this buys you 10 options.
You choose a knock-out level 1% below the market price at 9,900.
Key calculations
Knock-out distance (Market price - knock-out level) (10,000 - 9,900) = 100 |
Size in options Trade size / knock-out distance 1000 / 100 = 10 |
Knock-out fee Percentage of exposure. For major indices, for example, this is 0.02%. Exposure is calculated as size in options x market price. 10 x 10,000 = 100,000 100,000 x 0.02% = €20 |
Size in cash (Knock-out distance x size in options) + knock-out fee (100 x 10) = €1,000 + €20 = €1,020 This is what you’ll pay to open, and your maximum risk (not including any overnight funding fees you might pay). |
If the market rises Say the price moves up to 10,200. Your trade value increases to €3,000: 10 × (10,200 - 9,900) = €3,000 Your profit: €3,000 - €1,000 = €2,000 |
If the market falls Say the price drops to 9,950. Your trade value decreases to €500: 10 × (9,950 - 9,900) = €500 Your loss: €1,000 - €500 = €500 |
If the market hits your knock-out level Say the market price reaches 9,900 – or falls even lower – on the day you open your trade. Your trade is automatically closed, and you lose what you paid to open: |
Knock-out options are available only for selected countries.