A digital option that pays out if the underlying doesn’t touch (breach) a specified barrier. Therefore, the option includes a built-in digital knock-out mechanism. The call would be an up and out digital, and the put a down-and-out digital. The option’s payoff is a fixed amount provided the underlying price remains below (for a call) and above (for a put) the strike price during the option’s time to maturity (the observation period).
For example, a digital no-touch option could be one that pays a 7% coupon if the underlying never drops below 85% of its initial level.
It is also known as a no-touch digital.
