Digital Option Payoff
Binary option payoff is one of the main reasons that digital options are so popular among online traders.
The term digital option payoff relates to the fixed payoff the trader gets in case his digital
option has expired in the money. Unlike trading on Forex or other forms of trading, the payoff
here is fixed: it doesn't matter how much the price went up or down, as long as the option has
expired in the money it will always get the same payoff.
Every digital option has 3 possible outcomes: it can be "in the money", "At the money" or
"out of the money";
"In the money" means that the trader correctly predicted the behavior of the asset. it doesn't
matter if the price went up or down or the amount of the change, all that matters is if the trade was
made on the right direction; up or down. In case the prediction upon the asset price direction
was correct than we can say that the digital option is in the money, and as a result the trader
would make a substantial profit on his initial trading amount.
For example, placing a call option on Apple's stock means you are predicting that the price of the
stock will be higher on expiration than its strike price. If the price on expiration time was indeed
higher than its strike price, this means that the trade has expired in the money, and as a result
you'll make a high profit on your trade.
"At the Money" outcome means that the price of the underlying asset on the expiration time
stayed the same as its strike price. This outcome does not make a profit for the trader, but does
entitle him to get back a certain percent of the amount he traded.
"Out of the money" means that the prediction upon the behavior of the asset was wrong.
For example, if you place a put option on the S&P 500 index, thus predicting that its price will
go down upon expiration; suppose that the price of the index at expiration time was higher than its
strike price, this means your digital option has expired out of the money (wrong prediction).
in this case you will get back a certain percent of your trading amount.