What is a digital option?
The digital option is a financial tool that pays off in a specific amount or not at all. If the asset that is the basis of the option exceeds a certain value threshold, it brings the possibility of a specific amount of money. If the asset does not exceed the threshold, this option becomes worthless. Digital options are also known as binary options and possibilities of all or nothing; They classified as "exotic" possibilities despite their relative simplicity.
Normal shares is the right to buy or sell an asset for a certain price for a particular time or earlier. The price is called the strike price and the date is called the expiry date; The possibility of purchasing is called the possibility of calling and the possibility to sell is called PUT. If the base of assets never moves at the cost of strikes, normal options and digital options work in the same way: they are not worth the paper on which they are printed.
Difference between diThe gital option and normal option is that the digital option pays the same amount no matter how far above the strike price rises its background assets - or, in the case of Put, no matter how far it decreases. Normal call option becomes massively valuable if the basic asset becomes ten times more expensive. For a digital option, it does not mean whether the value of the asset rises a penny or a dollar above the strike price. The value of digital options due to normal possibilities thus reflects the evaluation of the market with its own volatility.
In fact, there are two significantly different categories of digital options. All options come in these categories, but the selection of the category is particularly a big difference in this case. American style options are more flexible because there is no time to be used; Whenever time is possible before the expiration date. The European style options must be precisely applied. This means that digital options in americanThe style pays off as soon as the asset exceeds the strike price, while the digital options in the European style are only worthwhile if the asset is above this price at the previously specified time. Most digital options are European style.
digital options can also be structured to pay cash or assets. This means that if the price of the asset in the digital call option exceeds a certain price, the owner of this option can obtain either a fixed cash amount or a fixed amount of assets. These types show names of cash-or nothing mounting and Asset-Neno-nothing.