These digital options are also know as “exotic” In Binary options like Digital options – they pay a definite amount of cash, asset or zero. These binary options always have found their way into the traditional market as well, and have increased its presence on different exchanges. Whenever the statistic value is more than or equal to the exercise price, the options pays off well, for every digital call. On the other hand a digital put option would also pay well when the value is below the price of the strike. Therefore one can see that there are two strike prices for digital options – one is the lower on and the other is the upper one.
Digital options or binary options or “exotic options” as they may be referred to as, are favorites with the traders who work with large banks and deal with a lot of money. Since the digital options is quite expensive, complex and not so liquid, thus one would not see a single retailer or a trader using this tools, but would be used by a group of traders. There are three parts to the Digital options – they are the recovery options, Bermuda options and the chooser options, which form part of the “exotic” tools. Single traders find it easier to use Bermuda option and the chooser option, which are simpler and easy to comprehend.
A digital CALL option comes into use when a trader is quite sure of the fact that the prices of that asset would go up. This would be using a call option of the digital options. This option helps to set a fixed cash payoff when the contract expires, when the strike price is less or equal to the exercise price. A digital PUT option comes into use when the trader believes in selling at the strike price of the asset. This is a short term strategy that a trader adopts, as this is useful in the bearish market trend. If the price of expiry is less than the exercise price, then there would be no cash settlement at all.
The most important advantage of this digital trade options is that it does not make you actually purchase it. This just forms an agreement of the strike price depending on the cost of the security. Thus the trader just needs to deal with two scenarios a) when the market goes up b) when the market falls.