How do digital options work?
Digital options work by offering two possible outcomes – agree or disagree – for a market statement, such as ‘the FTSE 100 will close above 7380’. In this scenario, the trader will buy the digital option if they agree with the statement and they will sell if they disagree.
The price quoted in a statement is known as the strike price. A trader will require the underlying market to close above or below this level in order to realise a profit, depending on whether they have agreed or disagreed with the statement.
Digital 100s are priced between zero and 100, with zero meaning that a broker feels an event is extremely unlikely and 100 meaning that they think it is highly likely. With IG, digital 100s are priced according to the option’s time to expiry, the current price of the underlying market and any expectations of future volatility.
When dealing digital options, a trader’s profit or loss is determined by the difference between the price at which they bought the digital option, to the closing price of either zero or 100. This would be multiplied by the amount the trader has staked per point of movement.