A gap option (specifically, a binary call option/ digital call option) that has a stated strike price different from its payoff strike. An example is a gap call option where the underlying’s price is 100, the stated strike price is 100, and the payoff strike is 105. The call option can be exercised when the underlying’s price reaches or crosses 100. However, it pays nothing unless the underlying reaches or crosses 105. 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.
