An underlying instrument's violation of the predetermined knock-out level results in the premature expiry of a knock-out warrant.
Knock-out warrants can expire prematurely if during their term the underlying instrument exceeds (call) or falls below (put) a predetermined price threshold, i.e. the knock-out level. Such an occurrence is referred to as a "knock-out event". Holders of knock-out calls profit from rising prices and holders of knock-out puts from falling prices for the underlying instrument. Despite the added risk involved, knock-out warrants have become very popular in recent years because changes in implied volatility have very little or no influence at all on the price of the products. The price fluctuations of knock-out products are therefore easier for investors to comprehend than those of normal warrants. In most instances, knock-out warrants are less expensive and have greater leverage than comparably structured "plain vanilla" warrants. A number of knock-out warrants and mini-futures feature an additional stop-loss threshold. When that level is breached, the product also becomes prematurely due and payable, but in most instances the investor receives payment of a residual value.