What is a one touch option Where can I trade

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One-Touch Option

What Is a One-Touch Option?

A one-touch option pays a premium to the holder of the option if the spot rate reaches the strike price at any time prior to option expiration.

Key Takeaways

  • A one-touch option pays a premium to the holder of the option if the spot rate reaches the strike price at any time prior to option expiration.
  • One-touch options are usually less expensive than other exotic or binary options like double one-touch, or barrier options.
  • Derivatives, like one-touch options, are not frequently traded by small investors.

Understanding One-Touch Options

One-touch options allow investors to choose the target price, time to expiration, and the premium to be received when the target price is reached. Compared to vanilla calls and puts, one-touch options allow investors to profit from a simplified yes-or-no market forecast. Only two outcomes are possible with a one-touch option if an investor holds the contract all the way through expiration:

  1. The target price is reached and the trader collects the full premium.
  2. The target price is not reached and the trader loses the amount originally paid to open the trade.

Like regular call and put options, most one-touch option trades can be closed before expiration for a profit or a 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 meet or breach a certain price level in the future, but who are not certain that price level is sustainable. Because a one-touch option has only a yes-or-no outcome by expiration, it is generally less expensive than other exotic or binary options like double one-touch or barrier options.

Derivatives, like one-touch options, are not frequently traded by small investors. There are some trading venues where they are available, but regulators in Europe and the U.S. have often warned investors that they may be overpriced. In many cases it is not possible to take advantage of that mispricing by becoming an option writer or seller. Binary or exotic derivatives are usually traded by institutions who can negotiate with each other for better pricing.

Outcome #1: Price approaches target price

A trader believes the S&P 500 will rise by 5% at some point over the next 90 days, but is not as certain about how long the index will remain 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 meets or exceeds that target price at any point over the next 90 days. Assume that two weeks later the S&P 500 has risen 2%, which has increased the value of the position because it is more likely that the index will reach that target price. The trader could choose to sell their one-touch option contracts for a profit or continue to hold the trade through expiration.

Outcome #2: Price remains flat or moves away from target price

Assume that a trader originally believed the S&P 500 would rise 5% over the next 90 days and opened a one-touch option trade to profit from his 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 drops 3% on unexpected news a week later, which makes it less likely that the target price would be reached before the options expire. This trader may then decide to either sell the options and close the trade at a lower price for a loss or hold it in the hopes that the market recovers.

Double One-Touch Option

What Is a Double One-Touch Option?

A double one-touch is a type of exotic option which gives the holder a specified payout if the underlying asset price moves outside of a specified range at any point before expiration. The buyer negotiates the price range with an upper and lower level, called the barrier levels, with the seller. The seller is often a brokerage firm.

Either one of the barrier levels must be breached prior to expiration for the option to become profitable and for the buyer to receive the payout. If neither barrier level is breached prior to expiration, the option expires worthless and the trader loses all the premium paid to the broker for setting up the trade. A one-touch option (without the double) will only have a single barrier level.

Key Takeaways

  • A double one-touch option is a type of barrier and binary option that pays out if the underlying price exceeds either an upper or lower price level before expiration.
  • This type of exotic option is most often used in forex markets to profit off of volatility in a currency pair.
  • If neither barrier is touched before expiration, the option expires worthless and the seller collects the full premium.

How Double One-Touch Options Work

Double one-touch and the converse, double no-touch, options are both barrier options. Because they have a “yes or no,” or binary payout, they are in the binary options category. As such, they are essentially bets that the underlying asset will move by a specified amount by a certain date.

Because of this structure, they bring an element of gambling into the equation. Indeed, they and their sellers are prone to fraud, which is perhaps why many jurisdictions ban these products. The payouts tend to favor the sellers, not unlike the way gambling games in casinos favor the “house.” In many ways, the double one-touch option is similar to being long an options straddle, in that it pays out if the price moves either up or down beyond certain points. The difference is that the barrier option nature requires just one ‘touch’ to trigger a payout.

While the landscape here is fraught with danger, the double one-touch option could be useful if an investor believes the price of an underlying asset will move significantly over a specified period. Double one-touch options are popular among traders in the forex (FX) markets.

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Several factors will impact the cost of the option. Just as the longer the time to expiration will increase the cost of the option, so will tighter barrier levels. Both are due to the higher probability that the underlying price will touch or exceed the barriers.

Example of a Double One-Touch Option

For example, if the current USD/EUR rate is 1.15, and the trader believes this rate will change significantly over the next 15 days, the trader could use a double one-touch option with barriers at 1.10 and 1.20. The investor can profit if the rate moves beyond either of the two barriers

Double One-Touch Options vs. Regular Options

As previously mentioned, double one-touch options are not the same as regular or vanilla options. One-touch and all other binary options are primarily over-the-counter instruments. The buyer and seller negotiate the terms, which includes the payoff amount, barrier levels, and expiration date. Note that there are no strike prices. Also, the seller is obligated to exercise the options, either at the agreed payout, at zero, or at expiration.

Regular options trade on formal exchanges and give the holder the right, but not the obligation, to buy or sell the underlying asset at a specified price by or on a particular date. They also have standardized strike prices, expirations and contract sizes. This standardization gives them the advantage of liquidity in a secondary market, and more assurances for both the buyer and seller that the trade and exercise, if it occurs, will take place promptly.

The trader in the example above could accomplish the same goal with traditional options by using a long strangle strategy or a long straddle strategy. The advantages of regular options include liquidity, transparency, and minimal counterparty risk.

A double one-touch option is also the converse of a double no-touch option. The holder of this option receives the payout if the price of the underlying asset remains within the two barrier levels. Again, the same result is possible with a short strangle or short straddle, although the loss potential is theoretically unlimited.

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Forex Options risk warning

An option is categorised as a red product as it is considered an investment product with a high complexity and a high risk.

You should be aware that in purchasing Foreign Exchange Options, your potential loss will be the amount of the premium paid for the option, plus any fees or transaction charges that are applicable, should the option not achieve its strike price on the expiry date

Certain options markets operate on a margined basis, under which buyers do not pay the full premium on their option at the time they purchase it. In this situation you may subsequently be called upon to pay margin on the option up to the level of your premium. If you fail to do so as required, your position may be closed or liquidated.

If you write an option, the risk involved is considerably higher than buying an option. You may be liable for margin to maintain your position and a loss may be sustained well in excess of the premium received.

By writing an option, you accept a legal obligation to purchase or sell the underlying asset if the option is exercised against you; however far the market price has moved away from the strike. If you already own the underlying asset that you have contracted to sell, your risk will be limited.

If you do not own the underlying asset the risk can be unlimited. Only experienced persons should contemplate writing uncovered options, then only after securing full detail of the applicable conditions and potential risk exposure.

Danish banks are required to categorise investment products offered to retail clients depending on the product’s complexity and risk as: green, yellow or red. For further information click here

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