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What are knock-outs?
Knock-outs are spread bets on an option. They automatically close – or get ‘knocked out’ – if our underlying price reaches your chosen knock-out level. They are available on forex, indices and commodities. Your maximum risk is equal to the options premium you pay on all knock-out trades, multiplied by your size.
Types of knock-out
There are two types of knock-out: bull and bear.
- You’d buy a bull knock-out if you believe the price of the underlying market will rise. The knock-out levels available will be below the current market price
- You’d buy a bear knock-out if you believe the price of the underlying market will fall. The knock-out levels available will be above the current market price
The price of a knock-out moves one-for-one with the underlying market, so for every point the market moves, the knock-out price moves one point too.1
You can close your knock-out position at any time before expiry – unless the knock-out level is reached, in which case your position will be automatically closed.
1This is not the case when the knock-out premium changes. If the knock-out premium changes, the price of the knock-out will move by the amount the premium changes.
How do I trade knock-outs?
Here you’ll find everything you need to know about trading knock-outs on the IG platform, including:
How do I use the knock-out ticket?
Let’s take a look at the deal ticket. This example is from our web platform, however the set-up is similar on our mobile apps.
Bull/bear: This determines whether you want to go long (bull) or short (bear) on the underlying IG price.1
Knock-out level: Enables you to select the price at which your position will automatically be closed.
Open price: This is the difference between the underlying IG price, and your knock-out level. It will include the knock-out premium (in this case 0.8), which you’ll receive back if you sell to close without being knocked out.
Close price: The price at which you can close this position, before being knocked out. Please note that you cannot sell to open – you’d need to buy a bear instead.
Size: The number of pounds (or equivalent base currency) you want to stake per point of movement.
Limit (optional): If you like, you can add a limit at which to lock in profits and close your position if the market moves in your favour.
Maximum risk: This is equal to your margin, which is calculated as:
Bull: ((underlying IG offer price – knock-out level) + knock-out premium) x size
Bear: ((knock-out level – underlying IG bid price) + knock-out premium) x size
How are knock-outs priced?
The open price (also known as the options premium) is the difference between IG’s underlying price and the knock-out level, plus the knock-out premium.
The knock-out premium is the fee for being protected against slippage. You’ll receive this back if you close the trade without being knocked out. Knock-out premiums vary according to the volatility of the underlying market – therefore they may increase if volatility increases, and decrease if volatility decreases.
The open price/options premium of the position will simply be:
- Bull (underlying IG offer price - knock-out level) + knock-out premium
- Bear (knock-out level - underlying IG bid price) + knock-out premium
Your total margin (and therefore total risk) is the open price multiplied by your trade size.
How is my profit or loss calculated?
Let’s say the FTSE is currently trading with an offer price of 7400. You decide to go long, by opening a bull position at £1 per point with a knock-out level at 7200. If the current knock-out premium is 0.8, the margin you’ll need to pay is as follows:
(7400 – 7200) + 0.8 = £200.80
The knock-out price will move one-for-one with the underlying IG market – so for every point our underlying price moves, the knock-out price moves exactly the same amount.1
- If the FTSE rises and the current bid becomes 7500, your running profit would be +100.
- If the FTSE drops and the current bid becomes 7300, your running loss would be -100.
- If the FTSE drops to your knock-out level, your realised loss would be -200.80, which includes the 0.8 knock-out premium.
All knock-outs settle based on a pre-determined expiry rule. To find out more, take a look at each market’s individual information in the platform.
You can close the position whenever you want before expiry – as long as the knock-out price is not hit, in which case you’ll automatically be closed out.
All your open positions will appear in the ‘positions’ tab on the left-hand side of the platform. To close the deal, click on the appropriate ‘close’ button on the same row. You will then need to confirm by clicking the highlighted ‘close’ button again.
You can also add a limit to your position. The position will only close if this limit price or better is reached.
1This is not the case when the knock-out premium changes. If the knock-out premium changes, the price of the knock-out will move by the amount the premium changes.
What are the costs of trading knock-outs?
1. Spread: the difference between the bid and ask.
2. Overnight funding charge: calculated based on the notional value of the underlying IG price and not the knock-out price. So in the previous example, the notional amount would be the current underlying IG price of 7400, multiplied by the size.
3. Knock-out premium: protects you from slippage on the knock-out level. Because the knock-out premium is included in the spread, you’ll receive the premium back when selling to close. This means you’ll only pay the premium if your knock-out level is hit.
What is my margin?
Your margin is equal to your maximum risk. Your maximum risk is limited to the loss you will incur if your knock-out level is reached. So by choosing your knock-out level and your size, you determine your margin – and your maximum risk.
Can a knock-out level be amended?
No, you can't amend your knock-out level once your deal has been placed. If you wanted to change your margin amount, you’d need to close your current position and open a new one.
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