What are Digital Options
A digital option is an instrument which allows traders to manually set the strike price and expiration date by taking a position with only two possible outcomes and a fixed payout. In order to profit, the price of a security must exceed the predetermined strike price.
A digital option combines the characteristics of a classic option, binary option and on-touch option. The ability of traders to determine their own strike price means that risk can be varied accordingly to the appetite of the individual investor. By placing the strike place close to the market price risk can be minimised at the expense of potential payoffs and vice versa.
Features of a Digital Option
Digital options are generally based on a currency pairing with a short-term lifespan. The maximum losses when using these instruments are 100%, however it is possible to make profits as high as 900%. This payoff disparity can be enticing to some investors, however the greater the target rewards the larger the risk of losing 100% of your position. Traders can close the trade any time before the expiry, helping to further increase the implementation of risk management strategies.
Are Digital Options Reportable?
They are OTC derivative options which occur off exchange to provide more flexibility to traders due to the lack of standardisation in strike price and expiration date, with participants essentially defining their own terms. There is no secondary market for the product types, therefore, these instruments fall under the regulator’s requirement for OTC derivative reporting.
How Should You Report Digital Options?
Digital options are traded in a wide range of jurisdictions around the globe and as such can incur reporting obligations for financial entities interacting with this market. These instruments fall under the category of exotic options, as such certain key fields are required for their reporting. Examples include but are not limited to strike price, expiration date, premium amount and product ID.
How Does TRAction Assist Their Clients?
With new financial instruments continually being created against the backdrop of a dynamic regulatory landscape, TRAction’s aim is to make trade reporting simple for our clients by staying ahead of any developments that may affect the reportability of our client’s transactions. This allows us to work closely with our clients, planning well in advance to implement any changes that may be required and use our expertise to advice on niche situations that arise through the regular course of business.
As this area of the industry develops, TRAction remains committed to making trade reporting simple by staying ahead of regulatory developments and monitoring for changes that may affect our clients. Don’t hesitate to contact us if you would like to know more.