What exactly are digital options and why do I can keep running into that term when looking for information on binary options? Has this happened to you? It can be confusing at first but let me put your mind at ease; digital options and binary options are one in the same. The term “digital options” emanated out of Europe, as most financial derivative products do, and has been and is still used to describe a financial instrument that has exactly two outcomes. In addition to “binary options” digital options are also commonly referred to as “all or nothing options” and “fixed rate options (FROs)”.

Digital Options Characteristics

Trading digital options is a simple game, you either win a specified amount or lose a specified amount all dependent on how the underlying asset moves. This is much different than regular options where the amount someone wins or loses is calculated based on the Black Scholes options pricing model which requires a variety of inputs including a volatility assumption, dividend and interest rate estimates, as well as definitive time and strike price component. As you can see, digital options pricing is a much simpler process as compared to Black Scholes which requires advanced math to calculate the value of an option.

Digital options provide traders an easy way to monetize their views on the short-term direction of an underlying asset. If you believe the price of an asset is going up in the next hour simply purchase a digital call, and if you believe the asset is going down in the next hour purchase a digital put, can’t get much easier than that.

But what do you get for picking the correct direction of digital options? Well digital options returns vary by platform, but you can expect to receive somewhere in the 70% to 90% range for winning trades and lose anywhere between 85% and 100% for losing trades. Each digital options trading platform will provide unique return characteristics for each specific asset so make sure you note the risk/return before placing a digital options trade.

Digital options are typically offered across a wide range of assets. The most common assets include forex (currency pairs), stocks (mostly U.S. and European based), commodities (gold, silver, crude oil, natural gas, copper), and indices (most major global indexes).

With expiration times spanning between 5 minutes all the way up to a month you should be able to find a use for the simplified risk/return features of digital options for your asset and event time frame of choice.