A binary option also known as all-or-nothing option is a financial contract that entitles its holder to a fixed payoff when the event triggering the payoff occurs or zero payoff when no such event occurs.

Possible payoff of a traditional option ranges from zero to some upper limit or infinity and it depends on the actual difference between the exercise price and the price of the underlying asset.

Payoff of a binary option on the other hand, is just a fixed amount which is not affected by the difference between the exercise price and the price of the underlying asset.

A binary option depends on the relationship between the exercise price and the price of the underlying asset only to determine whether the payoff will occur or not. It is also called digital option because its payoff is just like binary signals: A binary call option pays 1 unit when the price of the underlying asset is greater than or equal to the exercise price and zero when it is otherwise.

The Pricing of Binary Options | cozosen.web.fc2.com

This is expressed by the following formula:. A binary option payoff is exactly the opposite of a binary call option, as expressed by the following formula:. Keita Yoshihara is a trader at Foundation Investments.

What if the SET is 1,? In the second scenario where SET is 1,, payoff will be zero because the condition required to trigger payoff is not fulfilled i.

Option (finance) - Wikipedia

In this scenario Keita will have to let the options expire wothless. Written by Obaidullah Jan. Subjects Accounting Economics Finance Management Related Terms American Option Asian Option European Option Put Option Call Option.