Knock-out Features

Knock-out features are contract provisions in derivative instruments that cause the option to immediately terminate or expire worthless if the underlying asset price touches a specific barrier. These features are often used to reduce the premium cost of an option by limiting the payoff range.

From a risk management perspective, knock-out features introduce significant "cliff risk," where the delta and gamma of the position can change abruptly as the price approaches the barrier. Traders must be prepared for the sudden loss of hedge or the expiration of the position.

In the cryptocurrency market, knock-out options are sometimes found in structured products that aim to provide high yields but carry the risk of total loss if a certain price level is breached.