What is an Asset-Or-Nothing Call Option
An asset-or-nothing call is a type of digital option whose payout is fixed after the underlying asset exceeds the predetermined threshold or strike price. The payout depends only on whether or not the underlying asset closes above the strike price - in the money - at the expiration date. It does not matter how deep in the money as the payout is fixed.
Also called "binary call" or a "digital call."
BREAKING DOWN Asset-Or-Nothing Call Option
As the name suggests, asset-or-nothing options settle with the physical delivery of the underlying asset.
Although all digital options may appear to be simple, they are different from vanilla options and may be traded on unregulated platforms. Therefore, they may carry a higher risk of fraudulent activity. Investors who wish to invest in binary options should use platforms that are regulated by the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC) or other regulators. They also can carry a stigma of being close to a gambling instrument.
Both asset-or-nothing calls and asset-or-nothing puts either pay or they don't pay, hence the term "digital." Standard options pay on a sliding scale so the deeper in the money they move, the higher the payout.
There are other types of binary options including cash-or-nothing calls and cash-or-nothing puts. As the names suggest, they settle with in cash. And since they are digital, i.e. all or none, if the underlying price is above the strike price, it pays the underlying price. If it is not above the strike then the payoff is zero.
For example, assume the gold currently trades at $1,260 per ounce at 12:45 p.m., on June 2. A trader is bullish on gold and believes that it will trade above $1,275 before the end of that trading day on June 2. The trader purchases 10 gold $1,275 asset-or-nothing call options at 12:45 p.m. If gold closes above $1,275 at the end of the trading day, on June 2, the trader would receive 10 contracts worth of gold. If gold fails to close above $1,275, the trader loses the entire investment.
Closing just slightly in the money is all the call holder needs to profit. If the trader believes the underlying asset will close significantly higher than the strike price then standard option may be a better choice since it allows the holder to participate in that gain. The cost should also be lower.
American Style digital option automatically exercise the moment they get in the money, unlike American style standard options. This means that the holder gets the payoff immediately instead of waiting for expiration. This is similar to one-touch options.
European Style digital options only exercise at expiration. Most digital options are in the European Style.