What Is Single Payment Options Trading?
Single payment options trading (SPOT) is a type of option product that not only lets investors request that certain conditions be met in order to receive desired payouts, but also gives investors the opportunity to govern the size of payouts they wish to receive if said conditions are met.
The broker providing SPOT products will determine the likelihood that the conditions will be met and charge commissions accordingly. This type of arrangement is often referred to as a "binary option" because only the following two types of payouts are possible for the investor:
- The conditions set out by both parties come to fruition, and the investor collects the agreed-upon payout amount.
- The event does not occur as planned, and the investor loses the full premium paid to the broker.
- SPOT lets an investor request certain conditions.
- The broker sets the commission based on the likelihood the investor’s conditions will be met.
- SPOT is most commonly found in FOREX markets.
The Basics of Single Payment Options Trading
SPOTs are often found in the foreign exchange market. For example, if a trader believes that the EUR/USD will not break below 1.20 in 14 days, he or she would pay a certain premium to a broker, and then collect the agreed upon payout in 14 days, if this scenario turns out to be accurate. However, if the EUR/USD does in fact break below 1.20, then the investor will lose the full amount of the premium.
The true benefit of SPOT trading is the relative ease and simplicity for investors. In order to facilitate SPOT transactions, an investor only needs to envision scenarios for a pair of any two currencies. On the other hand, SPOT options can be intimidating for first-time SPOT investors, because the limitless number of predictive scenarios they can predict can feel daunting to newcomers. Fortunately, there are ways to simplify the selection process.
For example, the “one-touch spot” option will yield a payout merely if the exchange rate reaches a certain level before the expiration date. However, the payout is limited, and it is determined both by the duration of the option and the difference between the one-touch amount and the current exchange rate at the time of purchase.
SPOT offers ease and simplicity, where the investor is tasked with identifying certain scenarios for two currencies.
Alternatively, investors may also engage a "no-touch spot" option, where they will receive a payout if the exchange rate on a currency pair does not reach a certain level before expiration. But while many investors new to Forex Spot options first get their feet wet with the standard one-touch and no-touch options, it’s usually not long before most investors become comfortable enough to begin writing their own options, with different self-selected scenarios.