Asset-or-Nothing Put Option

What Is an Asset-or-Nothing Put Option?

An asset-or-nothing put option provides a fixed payoff if the price of the underlying asset is below the strike price on the option's expiration date. If instead it is above the strike price, then the option expires worthless.

Asset-or-nothing put options are a type of binary option, which are also known as "digital options." They are so named because their success or failure is based on a yes-or-no (binary) proposition.

Key Takeaways

  • Asset-or-nothing put options settle with the physical delivery of the underlying asset if the option expires in the money.
  • These binary options pay a predetermined payout, or else or zero at expiration.
  • Asset-or-nothing options can be a simplified risk hedge.

Understanding Asset-or-Nothing Put Options

Unlike regular put options, asset-or-nothing put options do not pay the difference between the strike price and market price of the underlying asset. In fact, asset-or-nothing put options do not allow the option holder to take a position in the underlying asset at all. Instead, they simply provide a fixed payout if the market price is below the strike price at the time of expiration.

Most asset-or-nothing put options are traded outside of the United States, and are usually structured as European options. Unlike American-style options, European options can only be exercised on their maturity date. Although some binary options do allow execution before the expiration date, this typically reduces the payout received.

Binary Options

Within the United States, a popular venue for trading binary options is the North American Derivatives Exchange (Nadex), a Chicago-based platform that is regulated by the Commodity Futures Trading Commission (CFTC).

Real World Example of an Asset-or-Nothing Put Option

Suppose you are an options trader who believes that shares in XYZ Corporation are likely to fall this Friday, due to an earnings report that you suspect will disappoint investors. The shares are currently trading for $30 apiece, and although you doubt that the fall will be too dramatic, you are quite confident that a decline will occur.

Searching for a way to profit from your prediction, you find an asset-or-nothing put option that expires on Friday, at the end of the trading day, with a strike price of $25. The terms of the contract state that if the market price of XYZ shares is below $25 by the end of trading on Friday, then you will receive a fixed sum of $50. If on the other hand, the shares are above $25, then your payout will be zero. Convinced that XYZ will decline below $25 on Friday, you decide to purchase the option.

On Friday, XYZ reports earnings that are even more disappointing than you imagined. The reaction from investors and analysts is strongly negative, with the stock declining all the way to $10 per share.

By the end of the day, you have mixed feelings. On the one hand, your asset-or-nothing put option was profitable, providing a fixed sum of $50. On the other hand, if the option you purchased had been a regular (or "plain vanilla") put option instead of an asset-or-nothing put option, you might have profited even more from XYZ's stunning decline.

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  1. Corporate Finance Institute. "American vs. European vs. Bermudan Options." Accessed Jan. 29, 2021.

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