A put option (put) 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 put option is a put with whose underlying’s price doesn’t exceed the net value of its strike price minus 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 put 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 $95 (or whatsoever price below the exercise price minus the premium), then the option holder will receive a payoff of $1100. In the opposite scenario, if the market share price is $110 (or whatsoever price less than the exercise price), the option holder receives nothing.
The binary call option is alternatively known as digital put option or all-or-nothing put option.
