What Is a ‘Barrier Option,’ and Why Is It Typically an OTC Product?

A barrier option is an exotic option whose payoff depends on whether the underlying asset's price reaches or 'hits' a pre-defined barrier level during the option's life. Due to the unique and complex nature of the barrier condition, these options are customized to the user's specific risk exposure, making them unsuitable for standardization and thus primarily traded in the OTC market.