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jackgurae
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Joined: April 8th, 2014, 3:02 am

Replicate Digital Option which strike not align on tick

February 22nd, 2017, 10:51 am

Digital option struck at 26.76. Payoff is either 1 or nothing.
Given that, Tick size for this price is 0.25.
How would you set up a Call Spread?

On expiry date, at the money,
26.75/26.76 would require 100x leverage for risk manager (buy at 26.75 and sell at 26.76) while trader only need 4x leverage (buy at 26.75 and sell at 27.00).

Does 26.75/27.00 even make sense?

(26.50/26.76 would require about 2x leverage.)