Asset-or-Nothing Put Option

What It Is:

An asset-or-nothing put option is an option with two possible outcomes: a fixed amount if the market value is below the strike price and no payment at all if it is higher than the strike price.

How It Works/Example:

A typical put option will have a market value based on the difference between the market price of the underlying asset and the strike price for that asset. An asset-or-nothing put option, or binary put option, is a put option for which there is a specified fixed payout for any price, prior to expiration, that is below the contract's strike price. There is no payment on any price that is higher than the strike price during that same timeframe.

To illustrate, suppose an asset-or-nothing put options contract on XYZ stock has a strike price of $50. The terms of the contract state that if XYZ stock dips below $50 prior to or at expiration, the holder will receive a fixed sum of $100. If the market price of XYZ stock exceeds the strike price prior to or at expiration, the holder will receive nothing.

Why It Matters:

Asset-or-nothing put options provide holders with a guaranteed amount of money regardless of how far the market price of the underlying asset falls below the strike price. Investors should understand that any price above the strike price automatically disqualifies the holder from any gains.

Post Your Comments...

Facebook Comments:

Cached on April 23, 2014, 11:33 am