Digital Option
Digital Option
A digital option is an option with a fixed payout attached to it, this payout is a percentage figure extracted from the invested amount.
The fixed payout percentage is set at the onset of the contract and the option can expire either in the money, at the money or out of the money.
If the option expires within the money, it does not matter how deep it is in the money, it will pay the same payout percentage for all options within the money.
If the option expires out of the money, the trader can expect to keep up to 18% of his initial investment; this outcome is already set at the onset of the contract.
If the option expires at the money, it means that the expiry level equals the level at which the contract was made, in that case the client receives his full investment amount.
Digital options are a way to protect your portfolio investment in a rapid moving market. They are also a way to speculate on market movement.
An option can be a Call option Or a Put option;
A Call option – is an option that provides profits to its holder once the underlying asset price increase in value, compared with the price quoted at the onset of the contract.
A Put option – is an option that provides profits to its holder once the underlying asset price decreases in value, compared with the price quoted at the onset of the contract.
The digital option payoff is the percentage that is to be pay in addition to the full investment amount in a case there is an expiry within the money.
The payoff rate is determined with great respect to the probability of the underlying asset to expire within the money.
And that is why a price of 0.7 on a digital option triggered by the Dow jones at a higher level than 10,000 points, can be simply interpreted as a 70% chance of the Dow jones to cross the 10,000 points within the contract life time.
Questions and Answers
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