A gap option (specifically, a binary put option/ digital put option) that has a stated strike price different from its payoff strike. As a European option (European put), the option can only be exercised only at the end of its life (i.e., at its expiration date).

An example is a gap put option where the underlying’s price is 100, the stated strike price is 100, and the payoff strike is 95. The put option can be exercised when the underlying’s price reaches or drops below 95. However, it pays nothing unless the underlying reaches or moves below 95. The difference between the stated strike price and payoff strike constitutes the gap. This gap reflects the difference 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.