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In the Blending Options dialog box, you can choose this checkbox to use the current layer to knock a hole all the way to the background layer. If there is no background layer, it will knockout to transparency.
      There are two ways to cause a layer to show the Knockout effect when it is selected. Either set the Fill opacity (not the regular layer opacity) of the layer you are using for the knockout to be partially, or entirely transparent to allow the background to be visible through the knockout. Fill opacity is set at the top of the Blending Options dialog box, just below where the general opacity and blend mode settings are found.
fill opacity set to zero
Or, choose a blend mode that removes visiblity from portions of the layer you are using for knockout.

If you choose the knockout option for a layer which is not grouped, and which is not in a layer set, both Deep and Shallow will knock through to the background layer, or, if there is no background layer, to transparency.
Knockout menu
If the layer you are blending is within a layer set, or is grouped with other layers, however, knockout works differently. It can knockout to the background, or it can knockout only to the bottom of the group of layer set, or to the first layer below the group or layer set. How it works will vary according to whether or not you have the Blend Clipped Layers as a Group checkbox selected, or whether or not your layer set’s blend mode is set to Pass Through (a blend mode available only for layer sets).
pass through blend mode
Study the examples below, and try and remember which variation does what.

I’ll show you what happens to a layer set, first. I used the image below, which consisted of various shapes on different layers, as shown in the Layers palette below the image. The background layer has a pattern fill which is obscured by the white fill layer directly below the set.
image with layer set


After double-clicking the purple ellipse’s layer, I changed its Fill opacity to zero in the Blending Options dialog box, and chose Shallow, and then Deep in the Knockout menu.
     When the layer set’s blend mode was set to the default Pass Through, and the Knockout menu set to Deep, the result is as shown below. The ellipse shape has knocked out all the way to the background layer which has the pattern fill, shown.

Changing the knockout menu’s setting to Shallow, while the layer set is using the Pass Through blend mode, punches through to the layer directly below and outside of the layer set, which is the layer with a white fill.

If the layer set’s blend mode is changed to any blend mode other than Pass Through, the elliptical knockout layer punches through to the white fill layer directly below the set, the same as shown above. This happens for both Deep and Shallow knockout settings.
     Only the Pass Through plus Deep combination will allow a layer within a layer set to knockout all the way to the background. In all other cases, the knockout goes to the layer directly below the set.
  Now I’ll show you what Knockout does when applied to a layer within a group. I used the image below for this example. It’s the same as the one above, but with a big blue circle added. Its Layers palette follows. As you can see, the base layer for the group is the blue circle.

 

Again, the purple ellipse’s Fill opacity was set to zero, and the Knockout option was selected. With grouped layers, the variable that makes a difference is the Blend Clipped Layers as Group check box.
Blend Clipped Layers as a Group
To change (uncheck) this setting, you would go to the base layer of the group, which is the blue circle in this case, and double click the layer. The option is found in the central part of the Blending Options dialog box.
     When Blend Clipped Layers as Group is checked, which is the default setting, both the Shallow and Deep knockout settings in the purple ellipse’s layer result in a knockout to the bottom of the group (the blue circle), as shown below.
Blend If Clipped On - Knockout Deep or Shallow
When the Blend Clipped Layers as Group check box is not selected in the group’s base layer’s Blending Options, a knockout setting of Deep for the purple ellipse’s layer knocks out to the background layer as shown below.
Blend Clipped Off - Knockout Deep
However, a Shallow knockout setting when Blend Clipped Layers as Group is not selected punches through to the white fill layer directly below, and outside of, the grouped layers as shown below.
Blend Clipped Off - Knockout Shallow
Are we confused yet?

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