Digital Option
An exotic option with a binary payoff: it pays a fixed amount if the underlying is above (for a digital call) or below (for a digital put) a specified strike at expiration, and zero otherwise. Also called binary options. Digital options have step-function payoffs and exhibit explosive Greeks near the strike at expiration, which makes them difficult to hedge and prone to wide bid-ask spreads. They are commonly used inside event-driven structured products (FDA approval payoffs, election-outcome payoffs) where the desired exposure is discrete rather than smooth.
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Related terms
American Option · Asian Option · Barrier Option · Basket Option · Butterfly Spread · Calendar Spread
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