Digital Option Pricing

Digital option pricing, also known as binary option pricing, involves valuing contracts that pay a fixed amount if a condition is met and zero otherwise. These are the simplest form of exotic derivatives but are notoriously difficult to hedge because their delta becomes extremely high as the expiration price approaches the strike.

In crypto, digital options are often used for speculative bets on whether an asset will be above a certain price. Pricing models must account for the high probability of the option expiring worthless or at full value, which creates a binary outcome.

The lack of a smooth payoff makes them highly sensitive to the precision of the underlying price feed and the timing of the expiration, requiring precise oracle data to settle correctly.