A type of binary options whose stated strike price is different from its payoff strike. That is, there is a gap between the price at which the option can be exercised and the price at which it would produce a payoff to the holder. The strike price determines the size of the option’s payoff, while a gap amount determines whether the payoff would be made or not.
For example, consider a gap call option where the underlying’s price is 100, the stated strike price is 100, and the payoff strike is 105. The option can be exercised when the underlying’s price reaches or crosses 100. However, it pays nothing unless the underlying reaches or crosses 105.
The gap option is also known as a pay-later option.
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