A knock-in option is a barrier option that becomes active (or “knocks in”) only when the underlying asset reaches a predetermined barrier level during the option’s life. These exotic options remain inactive until the barrier is touched, providing cost-effective hedging or speculation opportunities with contingent activation features. Knock-in options typically cost less than standard options due to their conditional nature.

Knock-in options include up-and-in calls/puts (activated when price rises above barrier) and down-and-in calls/puts (activated when price falls below barrier). These instruments are useful for hedging scenarios where protection is only needed if certain market conditions occur. The barrier monitoring and activation mechanics require sophisticated pricing models and risk management systems.

Real-world example: An investor buys a down-and-in put option on oil with a $70 barrier and $65 strike, paying reduced premium for protection that only activates if oil falls below $70, providing cost-effective hedging for severe price declines.