Key Takeaways
- Pays fixed amount if target price touched before expiry.
- All-or-nothing payout; loses premium if target missed.
- Ideal for volatile markets and short-term trades.
What is One-Touch Option?
A one-touch option is an exotic binary option that pays a fixed amount if the price of an underlying asset reaches a predetermined target price at any time before expiration, regardless of the final price. Unlike a traditional call option, the payout occurs as soon as the barrier is touched, making it a unique tool for traders seeking specific price movements.
This option type is commonly used in volatile markets where you expect a price to hit a level but not necessarily stay there until expiry.
Key Characteristics
One-touch options have distinct features that differentiate them from other derivatives:
- Fixed payout: You receive a predetermined sum once the target price is touched, independent of how long the asset remains at that level.
- Underlying assets: Often tied to forex pairs, stocks, or indices, with liquidity impacting pricing and execution.
- Barrier or strike price: The critical level the asset must touch or surpass to trigger payment.
- Expiration date: The time window during which the price touch must occur, ranging from days to weeks.
- All-or-nothing structure: If the target is not reached, the option expires worthless, emphasizing the tail risk in your position.
How It Works
When you buy a one-touch option, you specify a strike price and expiration date. If the underlying asset’s price hits or exceeds this level at any point before expiration, you receive the fixed payout immediately or at expiry, depending on the contract terms.
This setup allows you to capitalize on short-term volatility or directional moves without needing the price to remain at the target. Pricing models account for factors like market volatility and objective probability of the barrier being reached.
Examples and Use Cases
One-touch options serve various strategic purposes across markets:
- Airlines: Delta may use them to hedge fuel cost volatility, locking in protection if prices touch certain thresholds.
- Stock market: Traders might buy one-touch options on SPY to speculate on index spikes due to macroeconomic events.
- Forex trading: You can hedge currency exposure or place directional bets on pairs influenced by central bank announcements covered in macroeconomics.
- Beginner investors: Understanding these instruments can complement learning about derivatives and risk, as found in best ETFs for beginners.
Important Considerations
One-touch options are high-risk and best suited for traders with strong conviction on price movement timing. The all-or-nothing payoff means you can lose your entire premium if the target is not met.
Carefully assess broker credibility and contract terms before trading, as these options can be prone to abuse in unregulated markets. Use them to complement broader strategies rather than as standalone investments.
Final Words
One-touch options offer a clear payoff if a specific price level is reached before expiration, making them useful for targeted market moves or hedging. To proceed, analyze current market volatility and compare one-touch option terms across brokers to find the best fit for your strategy.
Frequently Asked Questions
A One-Touch Option is a type of exotic binary option that pays a fixed amount if the price of an underlying asset reaches or surpasses a specific target price at any time before expiration. If the target is not touched, the option expires worthless.
Unlike vanilla options that require the price to be at or beyond the strike price at expiration, One-Touch Options pay out as soon as the price touches the target level anytime before expiry, regardless of the price at expiration.
One-Touch Options typically involve underlying assets like forex pairs (such as EUR/USD), stocks, or indices. Forex markets are especially popular due to their high liquidity.
The key components include the underlying asset, a target price (also called barrier or strike), and an expiration date during which the price must touch the target to trigger a payout.
A call One-Touch Option pays out if the price rises to or above the strike price, while a put One-Touch Option pays if the price falls to or below the strike price before expiration.
They offer high reward potential in volatile markets, simple focus on a single price touch event, and sometimes immediate payout upon the price reaching the target, making them ideal for short-term speculation or hedging.
These options are high-risk and all-or-nothing, meaning you lose your entire premium if the price never touches the target. Additionally, trading OTC or on binary platforms can carry fraud risks and they are banned in some countries.
Yes, companies and traders use put One-Touch Options to hedge against adverse price movements, such as currency fluctuations, by securing a fixed payout if the price falls below a certain level.
