What It Is:

An asset-or-nothing call option either pays the value equal to one unit of the underlying asset if that asset is above the strike price or pays nothing if the asset is below the strike price at expiration.

How It Works/Example:

An asset-or-nothing call option, also known as a binary option, specifies two possible outcomes. These possibilities depend on whether or not the market price of the underlying asset is higher or lower than the option's strike price. If the market price of the underlying asset is higher than the strike price (in the money) at expiration, the holder will receive the value of one unit of the underlying asset for each option held. Conversely, if the market price is lower than the strike price prior to its expiration date, the holder receives nothing.

To illustrate, suppose an asset-or-nothing call option on stock XYZ has a strike price of $50. The terms of the contract state that if the market price of XYZ stock is above the strike price prior to or at expiration, the holder will receive the value of the underlying shares. So if shares of XYZ rise to $60, the option holder will receive this amount at expiration. If XYZ's share price falls to $40, the option holder will receive no payment at all.

Why It Matters:

Asset-or-nothing call options offer investors a simple alternative to an otherwise difficult security class. As with any binary option, the investor has a clear sense of what amount they will receive from an asset-or-nothing option, depending on the price of the underlying asset.