What is a One-Touch Option
A one-touch option is a type of contract that pays a premium if the price of an underlying market or asset reaches a predetermined target price.
BREAKING DOWN One-Touch Option
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, or 2) the target price is not reached, and the trader loses the amount originally paid to open the trade.
Closing Trades Before Expiration
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.
Outcome #1: Price approaches target price
A trader believes the S&P 500 will rise to 5% at some point over the next 90 days, but she is more uncertain about how long the index will remain at or above that target price. The trader pays $45 per contract to buy one-touch options that each pay $100, 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 her 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 if the target price is reached. Instead of rising, the index dropped 3% on unexpected news a week later, which makes it less likely that the target price would be reached before the options expired. This trader may then decide to sell the options and close the trade at a lower price for a loss.
Best Uses for One-Touch Options
One-touch options are useful for traders who believe that the price of an underlying market or asset will meet or exceed a certain price level in the future, but who are not sure that the higher price level is sustainable. Because a one-touch option has only one yes-or-no outcome by expiration, it is generally less expensive than other exotic or binary options like double one-touch, high-low, or barrier options.
Drawbacks of One-Touch Options
Derivatives like a one-touch option are not frequently traded by small investors. There are some trading venues where they are available however, 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.