DEFINITION of 'Cash-Or-Nothing Call'

An exotic option whose payoff is a predetermined amount (sometimes equal to the strike price) if the price of the underlying asset reaches (for American options) or exceeds (for European options) the strike price; if not, the payoff is set to zero. A cash-or-nothing call option is considered a binary or digital option because the payout is either a fixed amount or nothing.

BREAKING DOWN 'Cash-Or-Nothing Call'

By way of contrast, a plain vanilla call option's payout is the difference between the strike price and the market price when the option expires. Before the option expires, there are numerous possible payouts. An investor might buy a cash-or-nothing call option over a plain vanilla call option if he or she thinks the underlying asset's price will exceed a given level by only a small amount. The price of a cash-or-nothing call option is based on the probability of the underlying asset's price reaching (for American options) or exceeding (for European options) the strike price.

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