Definition of cash call or nothing

What is a call for cash or nothing?

A cash or nothing call (CONC) option is an option that has a binary outcome: you pay a fixed amount, if the underlying shares exceed a predetermined threshold or strike price, or you pay nothing. As a call option, your payment depends only on whether or not the underlying closes above the strike price (that is, in the money) on the expiration date. However, it does not matter how deep the money is as the payment is fixed. Instead, a sale of cash or nothing (CONP) would be paid if the underlying price falls below its strike price.

This type of option is also known as a binary or digital option, and can be compared to an asset or nothing call. The difference is that cash-or-nothing options are settled in cash, while asset-or-nothing options take physical delivery of the underlying stocks or assets.

Key takeaways

  • Cash-or-nothing calls are a type of digital or binary option used in forex trading that pays for itself or expires without value.
  • In particular, these options pay the full value if a condition is met, or zero if not; there is no partial or multiple payment.
  • Cash or nothing calls are settled in cash and will be paid if the underlying rises above the strike before expiration.

Understanding the call for cash or nothing

As the name suggests, cash or nothing options are settled in cash. The buyer pays a premium for the option and the cash settlement pays or not. The payout depends only on whether or not the underlying asset closes above the strike price (in money) on the expiration date. It doesn’t matter how deep the money is as the payment is fixed.

Although all digital options may seem simple, they are different from basic options and can be traded on unregulated platforms. Therefore, they can carry an increased risk of fraudulent activity. Investors who wish to invest in binary options should use platforms regulated by the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), or other regulators.

Binary options also carry the stigma of being like a gambling instrument because they pay or not, and the outcome often seems left to chance. Standard options pay on a sliding scale, so the more money they move, the higher the payout, and this gives them more of a feeling of being an investment or trading vehicle, rather than a betting vehicle, although the distinction is made. perceives greatly more. how real.

Cash or nothing vs. asset or nothing

There are other types of binary options, including asset-or-nothing calls and asset-or-nothing put options. However, although the name suggests that they are settled upon physical delivery of the underlying asset, that is not always correct.

Depending on the options, the reward could be the cash price of the underlying asset at expiration. And it’s digital, meaning all or nothing, so if the underlying price is above the strike price, you pay the underlying price. If it is not above strike, the reward is zero.

Example of a cash or nothing call

For example, suppose the Standard & Poor’s 500 Index (S&P 500 Index) is currently trading at 2090 at 12:45 pm on June 2. A trader is bullish on the S&P 500 Index and believes it will trade above 2100 before the end of that trading day on June 2. The trader buys 10 call options for cash or nothing of the S&P 500 2100 index at 12:45 pm for $ 50 per contract. If the S&P 500 Index closes above 2100 at the end of the trading day, June 2, the trader would receive $ 100 per contract or a profit of $ 50 per contract. Conversely, if the S&P 500 Index closes below 2100, the trader loses his entire investment, or $ 500.

Just a little close on the money is all the call holder needs to benefit. If the trader believes that the underlying asset will close significantly higher than the strike price, then a standard option (“vanilla”) may be a better option, as it allows the holder to participate in that profit. The cost should also be less.

Exercise style

Binary options are either American-style or European-style, depending on the individual market and the underlying asset.

American-style digital options are automatically exercised the moment they make money, unlike standard American-style options. This means that the holder receives the payment immediately rather than waiting for it to expire. This is similar to one-touch options.

European-style digital options are only exercised upon expiration. Most of the digital options are European-style.

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Mark Holland

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