Do You Know: What Is Cash-or-Nothing Call?

Introduction

What Is Cash-or-Nothing Call? An investor who purchases a cash-or-nothing call (CONC), a binary option, will either receive a predetermined payout if the price of the underlying stock increases over a certain level or strike price or none at all. A cash-or-nothing call option will pay $1 at expiration if the spot price exceeds the $K strike price but will pay nothing if the current price is lower than the $K strike price. The option's payment is zero if S is larger than K and one dollar if S is less than K.

Binary Option

You have two possibilities in binary options: cash-or-nothing and asset-or-nothing. With a cash-or-nothing binary option, you can either win a certain amount of money or nothing at all. This option does not pay out at the full market value of the underlying asset, whereas the asset-or-nothing option does. A binary call option will pay off the specified sum if the underlying asset's price is higher than the strike price at expiration; otherwise, it will pay nothing. The binary put option will pay off the specified sum if the underlying asset's value falls below the strike price; otherwise, it will have no payout.

The following equations can be used to determine the cost of an option: where Q represents the cash payoff, S represents the initial stock price, X represents the strike price, T represents the remaining time until maturity, q represents the dividend rate, is the volatility, and r represents the risk-free interest rate. N stands for the cumulative distribution function of the normal distribution.

Understanding

The underlying must close higher than the strike price on the expiration date for a call option like CONC to be profitable. Because the reward is a fixed sum regardless of the outcome, there is no consideration for how much money is involved. Conversely, a cash-or-nothing put (CONP) would pay out if the underlying price dropped below the put's strike. Similar to asset-or-nothing calls, binary options, also known as digital options, go by many other names (AONC). Cash-or-nothing options need the delivery of the underlying shares or assets, unlike AONC options, which are settled in cash.

As the name suggests, cash-or-nothing options must be settled in cash. The buyer is responsible for paying the option premium, and the cash settlement may or may not be paid. The underlying asset's closing price must be higher than the strike price (in the money) on the option's expiration date for it to be profitable. No matter how far in red, the payout will always be the same because it is fixed. Although they differ from "vanilla" options and can be traded on unregulated exchanges, all digital options may appear straightforward. People may be more vulnerable to deception as a result. Only use a platform that has received approval from the SEC, CFTC, or another regulatory authority if you want to trade binary options.

Example of a Cash-or-Nothing Call

Consider the S&'P 500 Index at 12:45 p.m. on June 2 as an example. At this time, it is trading at $2,090. According to a bullish investor, the S&'P 500 Index will end the day's trading session at or above 2,100. The investor spends $50 apiece at 12:45 p.m. to purchase 10 call options on the S&'P 500 Index with a strike price of 2,100. If the S&'P 500 Index closes at 2,100 or higher on June 2, the trader will profit by $100 per contract (a $50 gain). The trader will lose their entire $500 investment if, on the other hand, the S&'P 500 Index closes at a level lower than 2,100. Even if the option only narrowly closes in the money, the call holder will still profit. A vanilla option might be a preferable choice for buyers who believe that the underlying asset's closing price will be significantly higher than the option's strike price. Additionally, the cost must be decreased.

Cash-or-Nothing vs. Asset-or-Nothing

Two other instances of binary options are asset-or-nothing calls and asset-or-nothing puts. Despite the name, not all of these trades need the underlying asset to be delivered to settle. Depending on the terms of the option, the payment can be the cash value of the underlying asset as of the option's expiration date. The underlying price is paid if it is higher than the strike price because it is digital or "all or nothing." There won't be a payout unless it exceeds the strike.

Conclusion

Cash-or-nothing calls are binary or digital option used in foreign currency trading that either pays out at expiration or is worthless. With these alternatives, there are no partial or numerous payments; the full value is paid if the condition is met and zero if not. A cash-or-nothing call will settle for the strike price in cash if the underlying asset's value rises above the strike price before the option expires.