A call option (call) in which the payoff is either a fixed amount for an in-the-money option (ITM option) or nothing for an out-of-the-money option (OTM option). An in-the-money call option is a call with a strike price being below the net amount of its underlying’s market price minus the premium, at a given point within its time to maturity (for American options) or at expiration date (for European options).
For example, an investor is contemplating purchasing a binary call option on the shares of XYZ company. The exercise or strike price is $100 per share, and the option fixed payoff is $1100. At expiration, if the market share price is $105 (or whatsoever price more than the exercise price), then the option holder will receive a payoff of $1100. In the opposite scenario, if the market share price is $95 (or whatsoever price less than the exercise price), the option holder receives nothing.
The binary call option is alternatively known as digital call option or all-or-nothing call option.
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