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Digital Options

A digital option or a binary option is an investing route in which the pay-out of the stock is pre-determined in the contract from the onset of the purchase. Also known as the “all or nothing route”, when an investor purchases a digital option there are only ever 2 possible outcomes; 1.

An in-the-money result will earn the investor the fixed return plus their original premium back or 2. An out-of-the-money result will deprive them only of their original premium, and in some cases even compensate them with a 15% return.

For example, you decide to purchase a $200 Call option of stock XYZ which you believe will rise above its current price of 1.2209. The fixed return for this option is 70%. The stock finishes on 1.2211, 2 points ahead of the original strike price and so you would now receive a pay-out of $340 ($140 of earnings from the fixed return and $200 of your original premium).

If the stock expires on anything below the original strike price you would only lose your original premium of $200, never more. So we see, different from purchasing actual stocks outright, digital options offer security to investors who would rather not rely on how well the stock is necessarily doing, but rather on simply guessing which way it is moving.