Trading Knockout Options

Trade CFDs with limited risk and limitless
potential upside with City Index.

Key features

Knockout Options are 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:

Higher leverage and lower risk

By choosing your own Knockout Level and trade size, you determine the margin requirement and maximum risk on the trade. A trade will automatically close (get ‘knocked out’) if the City Index underlying market price reaches your chosen level.

Move one-for-one with underlying market

Knockout Options have a unique feature whereby the price moves one-for-one with the underlying City Index price. For every point the underlying market moves, the price of the Knockout Option moves by the same amount.

Buy to open

You must buy to open a Knockout Option position. You can long the underlying market by buying an UP KO, or short the underlying market by buying a DOWN KO. If the market moves in your chosen direction you will make a profit; if it moves against you, you will make a loss.

Expiry

Knockout Options have an expiry, which is stated in the market name e.g. Wall Street Nov 20 UP KO (this indicates the Knockout Option expires on the last trading day of November 2020). You can close your position at any time before expiry (unless your Knockout Level is triggered).

Example of a Knockout Option trade

  • You believe the Wall Street futures market price is going to rise, so you buy a Wall Street Nov 20 UP KO with an underlying Ask Price of 29025.5.

    You place the buy position at $5 per point with a Knockout Level of 28925.5.

  • The opening price of the Knockout Option is therefore 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.

    The 1.1 multiplier is an additional margin requirement added to comply with MAS regulations.

  • Your Maximum Risk is the Knockout Option opening price multiplied by the size of the trade, and in this instance is $500 – you cannot lose more than this if the Knockout Level was reached, making it a limited-risk trade.
  • Wall Street moves in your favour by 50 points to 29075.5.

    You choose to take profits by closing your position. Profit and loss for a Knockout Option 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

Compare Knockout Options

See how Knockout Options compare to a standard CFD trade with the example below, including margin requirement and maximum loss.

Market: Wall Street / Wall Street UP KO

Trade Size: Long $5/point at 29025.5

Scenario: Wall Street drops by 200 points to 28825.5. The Knockout Option and Guaranteed Stop trades close automatically at the specified level, whilst you would need to manually close the standard trade.

Knockout Option CFD trade
(Guaranteed Stop Loss Order)
CFD trade
(No stop)
Knockout Level / Stop Level 28925.5 28925.5 N/A
Knockout Price / Stop Distance 100 100 N/A
Maximum Risk $500 $500 Unlimited
Margin Required $550 $550 $7,256.38
Closing Price 28925.5 28925.5 28825.5
Realised Loss $500 $500 + $10 stop premium $1000

What are the costs involved?

Knockout Options costs are fully transparent and simple to understand. You will know the cost of each trade you place upfront, with no hidden fees or charges. We calculate the margin requirement based on your chosen Knockout Level and trade size, which covers the spread cost (including the protection of your guaranteed Knockout Level).

You can find out more about Knockout Option costs on the Market Information page and in the Market 360 tab on our Web Trader platform.

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