POWER INTEGRATIONS, INC. NONSTATUTORY STOCK OPTION AGREEMENT FOR OUTSIDE DIRECTORS

Exhibit 10.9

POWER INTEGRATIONS, INC.

NONSTATUTORY STOCK OPTION AGREEMENT

FOR OUTSIDE DIRECTORS

THIS NONSTATUTORY STOCK OPTION AGREEMENT FOR OUTSIDE DIRECTORS (the “ Option Agreement ”) is made and entered into as of                                                       , by and between Power Integrations, Inc. and                                      (the “ Optionee ”).

The Company has granted to the Optionee an option to purchase certain shares of Stock pursuant to the Directors Equity Compensation Program under the 2007 Equity Incentive Plan upon the terms and conditions set forth in this Option Agreement (the “ Option ”). In the event of any conflict between the provisions of the Option Agreement and those of the Plan, the provisions of the Option Agreement shall control.

1. Definitions and Construction.

1.1 Definitions. Whenever used herein, the following terms shall have their respective meanings set forth below:

(a) “ Date of Option Grant ” means                              .

(b) “ Number of Option Shares ” means                              shares of Stock, as adjusted from time to time pursuant to Section 9.

(c) “ Exercise Price ” means $              per share of Stock, as adjusted from time to time pursuant to Section 9.

(d) “ Initial Exercise Date ” means the Initial Vesting Date.

(e) “ Initial Vesting Date ” means                              .

(f) “ Vested Ratio ” means, on any relevant date, the ratio determined as follows:

(g) “ Option Expiration Date ” means the date ten (10) years after the Date of Option Grant.

(h) “ Board ” means the Board of Directors of the Company. If one or more Committees have been appointed by the Board to administer the Plan, “Board” shall also mean such Committee(s).

(i) “ Code ” means the Internal Revenue Code of 1986, as amended, and any applicable regulations promulgated thereunder.

(j) “ Committee ” means a committee of the Board duly appointed to administer the Plan and having such powers as shall be specified by the Board. Unless the powers of the Committee have been specifically limited, the Committee shall have all of the powers of the Board granted in the Plan, including, without limitation, the power to amend or terminate the Plan at any time, subject to the terms of the Plan and any applicable limitations imposed by law.

(k) “ Company ” means Power Integrations, Inc., a Delaware corporation, or any successor corporation thereto.

(l) “ Consultant ” means any person, including an advisor, engaged by a Participating Company to render services other than as an Employee or a Director.

(m) “ Director ” means a member of the Board or of the board of directors of any other Participating Company.

(n) “ Disability ” means the permanent and total disability of the Optionee within the meaning of Section 22(e)(3) of the Code.

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(o) “ Employee ” means any person treated as an employee (including an officer or a Director who is also treated as an employee) in the records of a Participating Company; provided, however, that neither service as a Director nor payment of a director’s fee shall be sufficient to constitute employment for purposes of the Plan.

(p) “ Exchange Act ” means the Securities Exchange Act of 1934, as amended.

(q) “ Fair Market Value ” means, as of any date, the value of a share of Stock or other property as determined by the Board, in its sole discretion, or by the Company, in its sole discretion, if such determination is expressly allocated to the Company herein, subject to the following:

(i) If, on such date, there is a public market for the Stock, the Fair Market Value of a share of Stock shall be the closing sale price of a share of Stock (or the mean of the closing bid and asked prices of a share of Stock if the Stock is so quoted instead) as quoted on the Nasdaq National Market, the Nasdaq Small-Cap Market or such other national or regional securities exchange or market system constituting the primary market for the Stock, as reported in the Wall Street Journal or such other source as the Company deems reliable. If the relevant date does not fall on a day on which the Stock has traded on such securities exchange or market system, the date on which the Fair Market Value shall be established shall be the last day on which the Stock was so traded prior to the relevant date, or such other appropriate day as shall be determined by the Board, in its sole discretion.

(ii) If, on such date, there is no public market for the Stock, the Fair Market Value of a share of Stock shall be as determined by the Board without regard to any restriction other than a restriction which, by its terms, will never lapse.

(r) “ Parent Corporation ” means any present or future “parent corporation” of the Company, as defined in Section 424(e) of the Code.

(s) “ Participating Company ” means the Company or any Parent Corporation or Subsidiary Corporation.

(t) “ Participating Company Group ” means, at any point in time, all corporations collectively which are then Participating Companies.

(u) “ Plan ” means the Power Integrations, Inc. 2007 Equity Incentive Plan.

(v) “ Securities Act ” means the Securities Act of 1933, as amended.

(w) “ Service ” means the Optionee’s service with the Participating Company Group, whether in the capacity of an Employee, a Director or a Consultant. The Optionee’s Service shall not be deemed to have terminated merely because of a change in the capacity in which the Optionee renders Service to the Participating Company Group or a change

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in the Participating Company for which the Optionee renders such Service, provided that there is no interruption or termination of the Optionee’s Service. The Optionee’s Service shall be deemed to have terminated either upon an actual termination of Service or upon the corporation for which the Optionee performs Service ceasing to be a Participating Company.

(x) “ Stock ” means the common stock of the Company, as adjusted from time to time in accordance with Section 9.

(y) “ Subsidiary Corporation ” means any present or future “subsidiary corporation” of the Company, as defined in Section 424(f) of the Code.

1.2 Construction. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of this Option Agreement. Except when otherwise indicated by the context, the singular shall include the plural, the plural shall include the singular, and the term “or” shall include the conjunctive as well as the disjunctive.

2. Tax Status of the Option . This Option is intended to be a nonstatutory stock option and shall not be treated as an incentive stock option within the meaning of Section 422(b) of the Code.

3. Administration . All questions of interpretation concerning this Option Agreement shall be determined by the Board, including any duly appointed Committee of the Board. All determinations by the Board shall be final and binding upon all persons having an interest in the Option. Any officer of a Participating Company shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, or election which is the responsibility of or which is allocated to the Company herein, provided the officer has apparent authority with respect to such matter, right, obligation, or election.

4. Exercise of the Option .

4.1 Right to Exercise. Except as otherwise provided herein, the Option shall be exercisable on and after the Initial Exercise Date and prior to the termination of the Option (as provided in Section 6) in an amount not to exceed the Number of Option Shares multiplied by the Vested Ratio less the number of shares previously acquired upon exercise of the Option. In no event shall the Option be exercisable for more shares than the Number of Option Shares.

4.2 Method of Exercise. Exercise of the Option shall be by written notice to the Company which must state the election to exercise the Option, the number of whole shares of Stock for which the Option is being exercised and such other representations and agreements as to the Optionee’s investment intent with respect to such shares as may be required pursuant to the provisions of this Option Agreement. The written notice must be signed by the Optionee and must be delivered in person, by certified or registered mail, return receipt requested, by confirmed facsimile transmission, or by such other means as the Company may permit, to the Chief Financial Officer of the Company, or other authorized representative of the Participating Company Group, prior to the termination of the Option as set forth in Section 6, accompanied by

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full payment of the aggregate Exercise Price for the number of shares of Stock being purchased. The Option shall be deemed to be exercised upon receipt by the Company of such written notice and the aggregate Exercise Price.

4.3 Payment of Exercise Price.

(a) Forms of Consideration Authorized. Except as otherwise provided below, payment of the aggregate Exercise Price for the number of shares of Stock for which the Option is being exercised shall be made (i) in cash, by check, or cash equivalent, (ii) by tender to the Company of whole shares of Stock owned by the Optionee having a Fair Market Value not less than the aggregate Exercise Price, (iii) by means of a Cashless Exercise, as defined in Section 4.3(c), or (iv) by any combination of the foregoing.

(b) Tender of Stock. Notwithstanding the foregoing, the Option may not be exercised by tender to the Company of shares of Stock to the extent such tender of Stock would constitute a violation of the provisions of any law, regulation or agreement restricting the redemption of the Company’s stock. The Option may not be exercised by tender to the Company of shares of Stock unless such shares either have been owned by the Optionee for more than six (6) months or were not acquired, directly or indirectly, from the Company.

(c) Cashless Exercise. A “ Cashless Exercise ” means the assignment in a form acceptable to the Company of the proceeds of a sale or loan with respect to some or all of the shares of Stock acquired upon the exercise of the Option pursuant to a program or procedure approved by the Company (includi