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An option that is knocked out, or nullified, if the underlying instrument reaches a certain price. They are cheaper than standard options as they offer limited opportunities for profit. For example, an option writer might sell an option on a share trading at $95 giving the option buyer the right to buy it at $100 with a knockout limit of $109. If the share price rises above $100 the buyer will exercise the option. If the price rises above $109 then the option is nullified and the option writer has removed his exposure to large losses.
See also: Barrier Option