DEFINITION of 'Cash-or-Nothing Put'

An exotic option whose payoff is a specified fixed price (sometimes equal to the strike price) if the underlying asset's price falls below the strike price; if not, the payoff is set to zero. A cash-or-nothing put option is classified as a binary or digital option because the payout is either a set amount or nothing at all.

BREAKING DOWN 'Cash-or-Nothing Put'

A plain vanilla put option's payout, in contrast, is equal to the difference between the strike price and the market price when the option expires. Before the option expires, there is a wide range of possible payouts, not just two. An investor might buy a cash-or-nothing put option instead of a plain vanilla put option if he or she thinks the underlying asset's price will fall short of a given level by only a small amount. The price of a cash-or-nothing put option is based on the probability of the underlying asset's price falling below the strike price.

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