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Could someone please help me explain the concept of Digital Height clearly in the options world? Thank you

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  • $\begingroup$ Hello @OptionsTradingFinancier: if you like my answer, could you pls click on the tick mark to accept it and then your question will be marked as "answered"? Thanks so much. $\endgroup$ – Jan Stuller Jun 7 '20 at 18:06
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Digital option pays the amount $\delta$ if it ends up in the money otherwise it pays zero. Therefore, the pay-off diagram (pay-off on the y-axis, underlying price on the x-axis) looks like a straight line that starts at $S_T = K$ and the y-axis value of this straight line is equal to $y=\delta$. In other words, the "height" of the pay-off is equal to the digital option pay-off.

In the diagram below, $\delta = C$ and therefore the "height" of the digital option pay-off is $C$.

enter image description here

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  • $\begingroup$ Thank you so much for a really good explanation. So the digital height for any type of option is the the difference between the value of the option being ITM or expires worthless? $\endgroup$ – OptionsTradingFinancier Jun 7 '20 at 23:11

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