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.
- 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 usually less expensive than other exotic or binary options, such as barrier or double-touch options.
- Derivatives, like one-touch options, are not often traded by small investors.
Understanding the one-touch option
The one-touch option allows investors to choose the target price, time to expiration, and the premium that will be received when the target price is reached. Compared to vanilla call and put options, one-touch options allow investors to benefit from a simplified yes-or-no market forecast. Only two outcomes are possible with a one-touch option if an investor holds the contract until expiration:
- The target price is reached and the merchant charges the full premium.
- The target price is not reached and the trader loses the amount originally paid to open the trade.
Like normal call and put options, most one-touch option trades can be closed before expiration to make a profit or loss, depending on how close the underlying market or asset is to the target price.
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 who are not sure that the price level is sustainable. Because a one-touch option only has a yes or no result at expiration, it is generally less expensive than other exotic or binary options such as barrier or double-touch options.
Derivatives, like one-touch options, are not often traded by small investors. There are a few trading venues where they are available, but regulators in Europe and the US have often warned investors that they may be overpriced. In many cases, you can’t take advantage of that mispricing by becoming an option issuer or seller.
Binary or exotic derivatives are generally traded by institutions that can trade with each other for better prices.
Result n. # 1: the price is approaching the target price
A trader believes that the S&P 500 will rise 5% at some point over the next 90 days, but is not so sure how long the index will stay at or above that price. The trader pays $ 45 per contract to buy one-touch options that pay $ 100 per contract, if the S&P 500 reaches or exceeds that target price at any time during the next 90 days. Suppose that two weeks later the S&P 500 has risen 2%, which has increased the value of the position because the index is more likely to hit that price target. The trader could choose to sell his one-touch option contracts for profit or continue to hold the trade until expiration.
Result n. # 2: the price remains fixed or moves away from the target price
Suppose a trader believes that the S&P 500 will rise 5% over the next 90 days and has entered a one-touch option trade to profit from that forecast. The trader paid $ 45 for one-touch option contracts that will pay $ 100 per contract if the target price is reached. Instead of rising, the index falls 3% on unexpected news a week later, making it less likely that the target price will be reached before the options expire. This trader may decide to sell the options and close the trade at a lower price at a loss or hold it in the hope that the market will recover.