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Digital option
An option that pays a fixed predetermined amount if the underlying meets a set condition at maturity in the case of a European binary, or at the exercise date chosen by the option holder in the case of an American binary.
The set condition may be, for example, that the market price of the underlying must reach or exceed a predetermined threshold or barrier, such as the exercise price. If the condition is met, the fixed amount on the binary option will be paid regardless of the spread between the market price of the underlying and the exercise price; the option need only be at the money or in the money at maturity or at the exercise date, as the case may be, for the stipulated amount to be paid; the option pays nothing when out of the money.
Translations
Synonyms and variations
- All-or-nothing option
- American binary
- Bet option
- Binary option
- European binary
- Lottery option