DEFINITION of 'Double One-Touch Option'
A type of exotic option that gives an investor an agreed upon payout if the price of the underlying asset reaches or surpasses one of two predetermined barrier levels. An investor using this type of option is able to determine the position of both barriers, the time to expiration, and the payout to be received if the price does rise above one of the barriers. 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.
BREAKING DOWN 'Double One-Touch Option'
This type of option is useful for traders who believe the price of an underlying asset will undergo a large price movement, but who are unsure of the direction. Some traders view this type of exotic option as being like a straddle position, since the trader stands to benefit on a calculated price movement up or down in both scenarios. This type of option is growing in popularity among traders in the forex markets.
For example, assume the USD/EUR rate is 1.20 and the trader believes that next week's economic numbers will greatly affect this rate. A trader can use a double one-touch option with barriers at 1.19 and 1.21 to capitalize on this outlook. In this case, the trader stands to make a profit if the rate moves beyond either of these levels before expiry, and he/she stands to lose the premium if the rate remains within these barriers.