In options trading, the term barrier level denotes a predefined rate which determines the outcome of a barrier option.
Although price levels are typically used, barrier levels can be based on many different rates.
In the case of up-and-in barrier options, the barrier level is a price or rate which, if exceeded by the price or rate of the asset underlying the option, makes the option exercisable (in the money). In the case of up-and-out barrier options, the barrier level is the price or rate which, if exceeded by the price or rate of the underlying asset, renders the option invalid (out of the money).
The barrier level of a down-and-in barrier option is the price or rate which, if matched by the price or rate of the option’s underlying asset, makes the option exercisable. The barrier level of a down-and-out barrier option, on the other hand, is the price or rate which, if matched or exceeded by that of the underlying asset, makes the option invalid.
Options may have a single barrier level or multiple barrier levels. For example, a double barrier option may have a down-and-out barrier level and an up-and-out barrier level. If the price of the underlying asset meets or exceeds either the lower or the upper barrier levels, the option becomes invalid. The opposite holds true if down-and-in and up-and-in barrier levels are used. Combinations of up-and-in and down-and-out or down-and-in and up-and-out barrier levels may also be used.
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