What Is a One-Touch Option?
Let me explain what a one-touch option is: it's a type of option that pays a premium to you, the holder, if the spot rate reaches the strike price at any time before the option expires.
Key Takeaways
You should know that a one-touch option pays a premium to the holder if the spot rate hits the strike price anytime prior to expiration. These options are usually less expensive than other exotic or binary options, such as double one-touch or barrier options. Also, derivatives like one-touch options aren't frequently traded by small investors.
Understanding One-Touch Options
As an investor, you can choose the target price, time to expiration, and the premium you'll receive when that target is reached with a one-touch option. Compared to standard calls and puts, these allow you to profit from a simple yes-or-no market forecast. If you hold the contract through expiration, there are only two possible outcomes: either the target price is reached, and you collect the premium plus the negotiated payout, or it's not reached, and you lose the premium you paid to open the trade.
Just like regular call and put options, you can close most one-touch option trades before expiration for a profit or loss, depending on how close the underlying market or asset is to the target price.
These options are useful if you believe the price of an underlying market or asset will meet or breach a certain level in the future, but you're not sure that level will hold. Since a one-touch option only has a yes-or-no outcome by expiration, it's generally cheaper than other exotic binary options like double one-touch or barrier options.
Keep in mind that derivatives like one-touch options aren't often traded by small investors. There are some venues where they're available, but regulators in Europe and the U.S. have warned that they may be overpriced. In many cases, you can't take advantage of any mispricing by becoming an option writer or seller.
Fast Fact
Binary or exotic derivatives are usually traded by institutions that can negotiate better pricing with one another.
Outcome #1: Price Approaches Target Price
Suppose you believe the S&P 500 will rise by 5% at some point over the next 90 days, but you're not certain how long it will stay at or above that price. You pay $45 per contract to buy one-touch options that pay $100 per contract if the S&P 500 meets or exceeds that target at any point in those 90 days. Two weeks later, if the S&P 500 has risen 2%, that increases the value of your position because it's more likely to hit the target. At that point, you could sell your contracts for a profit or hold them through expiration.
Outcome #2: Price Remains Flat or Moves Away From Target Price
Now assume you thought the S&P 500 would rise 5% over 90 days and opened a one-touch option trade, paying $45 for contracts that pay $100 if the target is reached. But instead, the index drops 3% on unexpected news a week later, making it less likely to hit the target before expiration. You might then decide to sell the options at a lower price for a loss or hold on in hopes the market recovers.
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