Asset-or-Nothing Call Option
What it is:
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.