Knockout Options

  1. What is a Knockout Option?
  2. How do I trade a Knockout Option?
  3. What markets are available to trade Knockout Options?
  4. How do I open and close a Knockout Option position?
  5. What is the Knockout Level?
  6. How do I change my Knockout Level?
  7. What is the Maximum Risk?
  8. How much money do I need to trade Knockout Options?
  9. What platforms can Knockout Options be traded on?
  10. Where can I find Knockout Options in the platform?
  11. How do I determine the price of a Knockout Option?
  12. How is profit/loss calculated?
  13. What size positions can I hold?
  14. Why does the price I see for a Knockout Option index market differ from the equivalent cash CFD price?
  15. Do Knockout Option positions rollover?
  16. How long can I keep my position open?
  17. How are my positions settled at market expiry?
  18. How do I find out more detailed information about the Knockout Option market?
  19. What are the costs of trading Knockout Options?
  20. Can I trade Knockout Options on charts?
  21. Example trades - Long Knockout Option position on Indices
  22. Example trades - Short Knockout Option position on FX

1. What is a Knockout Option?

A Knockout Option is an innovative, limited-risk way to trade FX, Indices and Commodities, with a unique feature where the price moves one-for-one with the underlying City Index price. The key features of a Knockout Option are:

Flexibility: By selecting a Knockout Level when you place the trade, you have the flexibility to choose your own margin and the maximum risk on the trade.

Protection: The Knockout Level you choose on your trade is guaranteed, which ensures that your position is closed automatically at 0 if the underlying market reaches the Knockout Level. This means you always know your maximum risk when you place a trade.

Transparent: The Knockout Option price is displayed at the time you place the trade - there are no hidden fees or costs.

Expiry: Knockout Options have an expiry. The expiry month is stated in the name of the market e.g. USD/JPY Nov 20 UP KO (this indicates the Knockout Option expires on the last trading day of November 2020).

There are two types of Knockout Option - UP KO and DOWN KO.

UP KO: If you think the price of the underlying market will rise you would buy an UP KO

DOWN KO: If you think the price of the underlying market will fall you would buy a DOWN KO

2. How do I trade a Knockout Option?

You can find the list of available Knockout Option markets in our Web Trader platform and mobile apps, available for iOS and Android.

Decide whether you want to buy an UP KO or a DOWN KO and select that market to open a deal ticket, and then decide your Knockout Level and trade size before placing your trade.

To place a Knockout Option trade you need to:

  • Choose to BUY an UP KO or DOWN KO market
    • e.g. Wall Street Nov 20 UP KO if you think the market will rise
    • e.g. Wall Street Nov 20 DOWN KO if you think the market will fall
  • Set your Knockout Level
    • Choose the Knockout Level where your trade will automatically close if the underlying price is met
    • For an UP KO market the Knockout Level will be below the City Index underlying Ask price
    • For a DOWN KO market the Knockout Level will be above the City Index underlying Bid price
  • Knockout Price
    • This is the distance between the price of the underlying market at the time of placing the trade and the Knockout Level
      • For an UP KO trade: City Index underlying Ask price - Knockout Level
      • For a DOWN KO trade: Knockout Level - City Index underlying Bid price
  • Set your trade size in Quantity
    • FX: the number of Lots, where 1 Lot = 10,000 units of the base currency of the underlying market, or first named currency
    • Indices/Commodities: the amount per point, denominated in the currency of the underlying market
  • Associated Order (optional)
    • Choose a closing Stop or Limit Order to take profits automatically or manage risk
  • Premium Required
    • This is the total margin of your trade - the amount of available equity you need to open a position.
    • It is calculated by multiplying the Knockout Option opening price by the size of the trade entered under 'quantity' (this figure will be your Maximum Risk), then multiplying by 1.1. The additional 1.1 is an additional margin requirement required to comply with MAS regulations.
    • This value changes on the deal ticket depending on what you enter - by adjusting your trade size and Knockout Level you will see that you can determine the margin of your trade.
  • Percentage of available funds
    • This is the % of the funds available in your account that the margin contribution for the KO trade takes up
  • Place your trade
    • Once you're happy with the details entered on the deal ticket, select 'Place Trade'

3. What markets are available to trade Knockout Options?

Knockout Options are available across a range of major FX, Indices and Commodities markets. You can view the full range of available markets here, or in our trading platform.

4. How do I open and close a Knockout Option position?

To open a position you can BUY a Knockout Option. You can Long the underlying market by BUYING an UP KO or Short the underlying market by BUYING a DOWN KO.

You can SELL a Knockout Option to close an open position. You can use associated orders to attach a Stop/Limit to close any open position to take profits automatically or to manage risk.

5. What is the Knockout Level?

The Knockout Level determines the value of your Knockout Option - the value of your Knockout Option is always the difference between the price of the Underlying and your Knockout Level. This ensures that your position is closed precisely when the price in the Underlying market reaches your Knockout Level if a position moves against you.

You set your Knockout Level when opening a position. Each market has a minimum distance away from the Underlying City Index price, which you will see on the deal ticket.

If your Knockout Level is reached, your position is immediately closed at 0 ensuring that any losses are limited to the amount you were willing to risk when opening the position.

6. How do I change my Knockout Level?

Once a position is opened the Knockout Level cannot be changed. To manage risk, you can either attach a stop order to an open position, or close it and re-open a new position with the desired Knockout Level.

7. What is the Maximum Risk?

Maximum Risk is the maximum amount you can lose on the trade, should the market move against you and your Knockout Level is reached. You have the flexibility to set the Maximum Risk on a Knockout Options trade by choosing a Knockout Level and trade size when you place a trade.

8. How much money do I need to trade Knockout Options?

You can set the amount of equity you need on your account flexibly to suit your needs. The margin requirement - the minimum equity you must have in your account - is always the total value of your Knockout position (your Maximum Risk) multiplied by 1.1. In other words, it's the difference between the Knockout Level and the price of the Underlying market multiplied by your trade size in amount per point, then multiplied by 1.1 - which means it fluctuates with the Knockout Price.

9. What platforms can Knockout Options be traded on?

You can trade Knockout Options on our Web Trader and AT Pro desktop platforms, and Mobile apps available on iOS and Android.

Please ensure that you have the latest version of the apps downloaded to your device.

Knockout Options are not available on our Meta Trader platforms.

10. Where can I find Knockout Options in the platform?

You can find the full list of available markets under the ‘Knockout Options’ section of the ‘Markets’ list, which is located on the ‘Browse Markets’ tab.

Alternatively, you can use the platform search bar and type in the Knockout Option market you are looking for, such as Wall Street Nov 20 UP KO.

11. How do I determine the price of a Knockout Option?

The price of a Knockout Option at any given time is the distance between the price of the underlying market and the Knockout Level which means that they move in lockstep. For example, if the underlying price moves up one point, the price of the Knockout Option will move by exactly the same amount. Once a Knockout Option trade is opened, the Knockout Price mirrors the price of the underlying asset.

  • For an UP KO trade: City Index underlying Ask price - Knockout Level
  • For a DOWN KO trade: Knockout Level - City Index underlying Bid price

12. How is profit/loss calculated?

The profit or loss on a Knockout Options trade is calculated by multiplying the difference between the opening level of the Knockout position and the closing price of the position by the trade size in amount/point.

P&L = (Knockout Option closing price - Knockout Option opening price) x amount/point

13. What size positions can I hold?

You can see the minimum and maximum size allowed on the Deal ticket, on the Market 360 tab in the City Index platforms and on the Market Information page.

14. Why does the price I see for a Knockout Option index market differ from the equivalent cash CFD price?

Knockout Option index markets are based off the underlying Futures pricing for Indices, and include dividend and financing adjustments within the price. These adjustments are determined by the market and thus are not set by City Index. The price for Knockout Option index markets will therefore differ from the cash index price displayed for standard index CFD markets, and follow the Futures price instead.

15. Do Knockout Option positions rollover?

Knockout Option positions do not rollover. All Knockout Option positions are closed automatically in line with the settlement rules for each market.

16. How long can I keep my position open?

You can keep your Knockout Option position open until market expiry, which you can see in the market name, unless the Knockout Level is reached, at which point your position will automatically close at 0, or until closing orders are triggered.

17. How are my positions settled at market expiry?

If your position is still open at the time of the market expiry, we will automatically close the position at the mid-price of the Underlying and you will receive the profit or loss on that position.

For more detail on the time of market expiry please see the Market 360 tab in the City Index platforms.

18. How do I find out more detailed information about the Knockout Option market?

You can see more detailed information about Knockout Options on the Market 360 tab in the City Index platforms and on the Market Information page.

19. What are the costs of trading Knockout Options?

We charge a spread when opening a position which also covers the protection of the guaranteed Knockout Level.

As with standard CFD trades, Knockout Options positions on FX markets will also be subject to overnight financing charges on a daily basis. We use swap points to calculate the daily overnight financing adjustment amount for FX pairs. You find more detail on financing in the Market 360 tab in the trading platforms.

Indices and Commodity Knockout Option markets will not be subject to overnight financing.

20. Can I trade Knockout Options on charts?

Yes, you can trade Knockout Options from the market chart.

21. Example trades - Long Knockout Option position on Indices

You decide your Knockout Option strategy. Assume that Wall Street Futures (City Index's equivalent price for the Dow Jones Futures) is trading at a price of 29025.5 and you believe that it is going to rise - you decide to BUY a Wall Street Nov 20 UP KO. You Buy $5/point with a knockout level of 28925.5.

The opening price of the Knockout Option is 100 i.e. the distance between the price of the underlying market at the time of placing the trade and the Knockout Level.

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 20 UP KO would be:

100 x $5 x 1.1 = $550.

Scenario 1 - Closing your trade with a profit

Wall Street moves in your favour by 50 points to 29075.5 and your Wall Street Nov 20 UP KO position increases in value by exactly the same amount to a price of 150.

You choose to take the Knockout Option profit by selling your Wall Street Nov 20 UP KO. Profit and loss for a Knockout 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 20 UP KO would be:

(150 - 100) x $5/point = $250 profit

Scenario 2 - Closing your trade with a loss

Wall Street moves against you by 50 points to 28975.5 and your Wall Street Nov 20 UP KO position decreases in value by exactly the same amount to a price of 50.

You decide to close the trade with a loss by selling your Wall Street Nov 20 UP KO. The loss on your trade would be:

(150 - 100) x $5/point = $250 loss

Scenario 3 - Your trade reaches the Knockout Level and is closed instantly

Wall Street moves against you by 200 points to 28825.5 - below your Knockout Level - and your Wall Street Nov 20 UP KO position, moving in lockstep with the underlying market, decreases in value by exactly the same amount until it reaches 0.

As you set your Knockout Level to 28925.5, your trade was automatically knocked out (closed) when the underlying market reached this price, meaning you didn't incur any additional losses beyond this point despite the market price continuing to decrease.

In this scenario, the loss on your Wall Street Nov 20 UP KO would be:

(0 - 100) x $5/point = $500 loss

$500 is the Maximum Risk you determined when setting the Knockout Level and trade size when the position was opened. As you chose to trade Knockout Options, which are limited-risk, you ensured that you couldn't lose more than your chosen Maximum Risk amount.

22. Example trades - Short Knockout Option position on FX

You decide your Knockout Option strategy - EUR/USD is trading at 1.1025 and you believe it is going to fall - you decide to BUY EUR/USD Nov 20 DOWN KO. You Buy 5 lots (the equivalent to €50,000 of exposure, and a trade size of US$5/point) with a Knockout Level of 1.1325.

The opening price of the Knockout Option is 300 i.e. the distance between the price of the underlying market at the time of placing the trade and the Knockout Level.

The margin is calculated as follows:

Knockout Option opening price X Trade Size X 1.1

In this example, your margin requirement for EUR/USD Nov 20 DOWN KO would be:

300 x $5 x 1.1 = $1,650

Scenario 1 - Closing your trade with a profit

EUR/USD moves in your favour and drops by 300 pips to 1.0725. Your EUR/USD Nov 20 DOWN KO position increases in value by exactly the same amount to a price of 600.

You choose to take the Knockout Option profit by selling 5 lots of EUR/USD Nov 20 DOWN KO. The profit on your EUR/USD Nov 20 DOWN KO would be:

(600 - 300) x $5/point = $1,500 profit

Scenario 2 - Closing your trade with a loss

EUR/USD moves against you and rises by 200 pips to 1.1225. Your EUR/USD Nov 20 DOWN KO position decreases in value by exactly the same amount to a price of 100.

You decide to close the trade with a loss by selling 5 lots of EUR/USD Nov 20 DOWN KO. The loss on your trade would be:

(100 - 300) x $5/point = $1,000 loss

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