What are One Touch Options?

A One Touch Option is an example of an exotic option.  These options provide traders with payouts immediately after the price of the underlying asset has reached or has surpassed a predetermined barrier. These options allow the investor to set the position of the barrier being the time to expiration and the payout to be received once the barrier is broken. These options have two outcomes:

1. The barrier is breached and the trader will collect the full payout

2. The barrier is not breached and the trader loses the full premium.

One Touch Options are useful to traders who believe that the price of an underlying asset will exceed a certain level in the future, while unsure that this higher value will be sustainable. One Touch Options only have one barrier level which makes them less expensive than Double One Touch Options. In the last few years we have seen the popularity of these options rise, particularly in markets such as commodities and Forex.

Applying One Touch Options

Speculative traders use One Touch Options as bets on a rising or declining exchange rate. Some traders prefer to hedge and trade One Touch Options like a rebate in order to secure compensation in the case their trade is unsuccessful. One-touch options are often integrated into structured products to increase the returns on forward and interest rates.

The undiscounted value of the One Touch Option is the probability under the risk-neutral measure. The market standard is to quote the price of a One Touch Option in per cent of the payoff, which is a number between 0% and 100%. The price of a One Touch Option will depends on the over-hedge and the bid-ask spread. The spread in turn depends on the currency pair and the client.

Value of One Touch

The theoretical value of One Touch Options are based on the standard Black-Scholes model for the underlying exchange rate of EUR/USD, which is a geometric Brownian motion with constant parameters EUR interest rate, USD interest rate and volatility. The theoretical value is defined as the expectation under the risk neutral measure of the discounted payoff of the option. The trading price is the sum of the theoretical value and the over-hedge.

A One Touch Option is an option that automatically pays a set amount when the underlying asset trades at or beyond a specified price barrier before expiry time. In short you will be profits if the asset reaches a predetermined price. Traders will use One Touch Options when they believe an asset will reach a certain price before the option expires.

How It Works

If you choose a barrier above the current price of the asset, you will be profitable with a One Touch Option if the currency asset rises up to, and touches, the barrier before the option expires. If you choose a barrier below the current price, you will be profitable with a One Touch Option only if the asset falls down to, and touches, the barrier before the option expires.

For example, imagine you buy a One Touch Option on the EUR/USD with a barrier of 1.4200. If the EUR/USD currency pair moves to touch that barrier at 1.4200, you will be profitable.

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