What is a digital option?
A digital option is a type of option that provides a fixed payout if the underlying market moves beyond the strike price. As long as traders correctly predict the outcome, they’ll make a profit. If their prediction is incorrect, they’ll lose the premium they paid.
With any digital options trade, you can either buy or sell contracts. If you think the market will move above your selected strike price, you’d buy. This can be compared to buying a call option. If you think the price will move below the strike price, you’d sell. This can be compared to buying a put option.
It doesn’t matter how far beyond the strike price the market moves (either above or below), because there are only two possible outcomes – correct or incorrect. This means the maximum potential profit or loss are defined before the trade is placed. These maximum amounts depend on factors like the premium you pay, the order size, the strike price, and the contract duration.
Our Nadex platform makes it easy to see your maximum potential profit or loss on the order ticket before you hit that ‘place order’ button.
What is the difference between binary option and digital option trading?
The only difference between binary and digital option trading is in the names. Our Nadex Binary Options enable traders to predict the outcome of an underlying market’s movement, so it’s no different to a digital option.
However, ours are unique in the contract durations we offer. In addition to the standard five-minute durations you’ll find on most other platforms, we also offer durations of 20 minutes, two hours, daily, and weekly.
Practice trading digital options on a Nadex demo account.
Example of a digital option trade
Let’s use a hypothetical example to explain how digital options work.
Say you want to speculate on the price of EUR/USD on a five-minute contract. The indicative price is 1.19031. You’ll see a number of predetermined strike prices to choose from and a contract time (always given in ET).
The strike price closest to the market’s indicative price is considered to be at-the-money, meaning you’d have roughly a 50% chance of predicting the market’s movement correctly. A strike price above the current indicative price comes with a greater risk (meaning a lower probability of predicting correctly) but a greater potential reward, too.
Once you’ve selected a strike price, you’ll be asked something like, ‘Will the EUR/USD finish higher than 1.1907 @ 2:55PM?’ There are just two possible outcomes to this question – yes or no. If you think the answer is ‘yes’, you’d buy the digital options contracts. If you answer ‘no’, you’d sell. If your prediction is correct at the specified time, you’ll make a profit. If not, you’ll lose your premium. It’s important to note that you can exit your prediction early to either lock in profits or limit losses. To exit early, you’d simply sell a digital option that you previously bought or buy back a digital option that you previously sold.
How are digital options listed and regulated?
Trading digital options has developed a bad rap because of numerous unregulated and unscrupulous service providers, all of whom are outside of the US. Even in the US, there are only a few properly regulated digital options providers, of which Nadex is by far the premier exchange. Here’s a rundown on how to make sure you’re trading legally and staying safe from scams:
Digital options can only be traded on a regulated exchange – like Nadex. We’re regulated by the Commodity Futures Trading Commission (CFTC), which has legal oversight over our exchange and keeps a close eye on our practices. This means that you, the trader, are protected.
You can only trade digital options with a US-based exchange.
Only you can trade on your own account. It's illegal for anyone else to trade digital options on your behalf.
If you trade on Nadex, you can't fund your account with cryptocurrencies.