Cash or Nothing Binary

Cash or nothing binary option is a way of rewarding a trader for his successful prediction of the direction of the price in the market. As we know there are two outcomes of a binary trade, profit or loss, and therefore on the correct prediction of the price direction the trader either gets cash or nothing. There is another type of binary option by the name of “asset or nothing”. This implies the return by way of asset in case of a correct prediction. Therefore the classification is basically based on the nature of what a successful trader receives for his correct prediction.

In cash or nothing binary option the trader receives a predetermined amount of cash if his trade is “in the money” and he gets nothing if his trade is “out of money”. This type of binary option follows the European style of binary option trading where the trade is paid off only at the expiration date. This means that in case the price of the traded security does reach the strike price before the expiry date of the trade, the trader would not receive anything then. It is only on the expiration date that the price of the security would be compared with the strike price. This phenomenon can be explained with an example.

A trader makes a purchase of cash or nothing binary options for a stock that has the strike price of $400 and the reward is $5000. Now if at maturity or the expiry date the said stock is trading above $400, the trader would get cash of $5000 but if the stock is trading below $400, the trader would get nothing.