What is a one-touch option?
A one-touch option pays a premium to the option holder if the spot rate reaches the strike price at any time before the option expires.
Key points to remember
- A one-touch option pays a premium to the option holder if the spot rate reaches the strike price at any time before the option expires.
- One-touch options are generally less expensive than other exotic or binary options such as double-touch or barrier options.
- Derivatives, like one-touch options, are not often traded by small investors.
Understanding One-Touch Options
One-touch options allow investors to choose the target price, expiration time, and premium to receive when the target price is reached. Compared to vanilla calls and options, one-touch options allow investors to benefit from a simplified market forecast, yes or no. Only two results are possible with a one-touch option if an investor holds the contract until expiration:
- The target price is reached and the trader receives the entire premium.
- The target price is not reached and the trader loses the amount initially paid to open the transaction.
Like ordinary call and put options, most one-touch option transactions can be closed before expiration for a profit or loss depending on how close the market or underlying asset is to the price target.
One-touch options are useful for traders who believe that the price of an underlying market or asset will reach or exceed a certain price level in the future, but are not sure whether the level of price be sustainable. Because a one-touch option has only a yes or no result on expiration, it is generally less expensive than other exotic or binary options such as double-touch or barrier options.
Derivatives, like one-touch options, are not often traded by small investors. There are trading platforms where they are available, but regulators in Europe and the United States have often warned investors that they can be too expensive. In many cases, it is not possible to take advantage of this pricing error by becoming a writer or seller of options. Binary or exotic derivatives are generally negotiated by institutions which can negotiate among themselves for better pricing.
Result # 1: The price approaches the target price
A trader expects the S&P 500 to rise 5% at some point over the next 90 days, but is not as sure how long the index will stay at or above this price. The merchant pays $ 45 per contract to purchase one-touch options that pay $ 100 per contract, if the S&P 500 reaches or exceeds this target price at any time within the next 90 days. Suppose that two weeks later the S&P 500 rose 2% which increased the value of the position as it is more likely that the index will reach this target price. The trader could choose to sell his option contracts at a touch for a profit or continue to maintain the transaction until expiration.
Result n ° 2: the price remains stable or moves away from the target price
Suppose a trader originally believed that the S&P 500 would increase by 5% over the next 90 days and opened a one-touch option to take advantage of its forecasts. The trader paid $ 45 for one-touch option contracts which will pay $ 100 per contract if the target price is reached. Instead of rising, the index drops 3% on unexpected news a week later, making it less likely that the target price will be reached before the options expire. This trader can then decide to sell the options and close the transaction at a lower price for a loss or keep it in the hope that the market will recover.