What is a one‑touch option?
A one‑touch option is a binary, path‑dependent derivative that pays a fixed, pre‑agreed amount if the underlying asset’s price reaches (or “touches”) a specific target price at any time before expiration. If the target is never reached, the option expires worthless. Because only two outcomes are possible at expiry (payout or zero), one‑touch options provide a simple yes/no way to express a view that a price level will be breached within a time window.
Key takeaways
– Payout structure: fixed payment if the underlying hits the target (barrier) at any time prior to expiration; otherwise zero.
– Path‑dependent: a single touch at any time before expiry triggers the payout.
– Pricing factors: distance from current price to target, volatility, time to expiration, interest rates and dividends, and market liquidity.
– Use case: useful when you believe a level will be reached but are unsure whether the price will stay at or beyond that level.
– Risks and availability: typically traded OTC or on specialized venues, often used by institutions; regulators have warned retail investors about potential mispricing and lack of transparency.
Understanding how a one‑touch option works
– Party roles: the buyer (holder) pays a premium for the contract; the seller (writer) promises the fixed payout if the barrier is touched.
– Trigger rule: the option is “knocked in” (i.e., becomes payable) the instant the spot price equals or breaches the pre‑specified target at any time prior to expiry.
– Expiry outcome: if the barrier was touched at least once during the life of the option, the buyer receives the fixed payout; otherwise, the option expires worthless.
– Early close: like vanilla options, one‑touch positions can often be closed in the secondary market before expiration, allowing profit taking or loss cutting if market odds change.
How these differ from other options
– Compared with vanilla calls/puts: vanilla options’ payoffs at expiry depend on the final spot price relative to strike; one‑touch depends only on whether a barrier was hit at any time.
– Compared with other binary/exotic options: one‑touch is simpler than “double one‑touch” (pays if either of two barriers is hit) or barrier options with knock‑in/knock‑out complexities. Its binary nature typically makes the premium cheaper than nonbinary alternatives with the same directional exposure.
What determines price (the premium)?
– Distance to barrier: closer barriers are more likely to be touched → higher premium.
– Implied volatility: greater volatility increases the chance of touching the barrier → higher premium.
– Time to expiration: more time → more opportunity to touch → higher premium.
– Underlying drift and expected dividends: expected upward/downward drift changes touch probability.
– Interest rates: minor effect through discounted expected payout for long expiries.
– Liquidity and counterparty credit (for OTC contracts) also affect price.
Simple math for buyers (risk/reward)
– Let P = premium paid per contract, H = fixed payout per contract, and q = implied probability that the barrier will be touched before expiry. Expected value (EV) to buyer = q × H − P.
– Break‑even probability q* = P / H. If the buyer believes the true probability q > q*, the option has positive expected value (ignoring transaction costs and counterparty risk).
Illustrative example
– Suppose the S&P 500 is at 4,000. You buy a one‑touch option that pays $100 if the index reaches 4,200 (5% higher) at any time in the next 90 days. You pay a $30 premium per contract.
– Break‑even probability = 30 / 100 = 0.30 (30%). If you estimate there’s more than a 30% chance the index will hit 4,200 within 90 days, the trade has a positive expected value.
– Two possible short outcomes if you hold to expiry:
1) The index touches 4,200 at least once — option pays $100 (net profit = $70).
2) The index never touches 4,200 — option expires worthless (loss = $30).
– You may also be able to sell the option before expiry if market moves change q; its secondary‑market price will reflect the new implied touch probability.
Practical steps to trade one‑touch options
1. Define the thesis and time horizon
– Decide the underlying, the directional level you expect to be hit, and the maximum time frame (expiry). Keep the forecast explicit: are you betting on a short‑term spike, a sustained trend, or an event‑driven move?
2. Choose a target price (barrier) and payout structure
– Pick the strike/barrier (how far from current price) and the fixed payout per contract. Note: the farther the barrier, the cheaper the premium but the lower the probability of success.
3. Shop for market quotes and counterparties
– One‑touch options are often OTC or available on specialized platforms. Compare premiums and counterparty credit, and check whether there is a secondary market for early exit.
4. Calculate implied probability and expected value
– Compute q* = premium / payout and compare to your subjective probability that the barrier will be touched within the expiry. Account for transaction costs and counterparty risk.
5. Size the position and set risk limits
– Treat each contract like a fixed‑risk bet equal to the premium paid. Limit total exposure to a predetermined small percentage of capital because losses are binary and can be total.
6. Decide exit rules
– Determine conditions to sell before expiry (e.g., underlying moves closer or away, percentage profit target, or stop‑loss). One‑touch option prices will often rise significantly as the underlying approaches the barrier.
7. Monitor the trade and hedge if necessary
– If you’re the seller and the underlying approaches the barrier, consider hedging the exposure with the underlying or vanilla options. Buyers can also hedge complex exposures using dynamic strategies, but hedging is more common for institutional sellers.
8. Understand settlement and documentation
– Confirm settlement mechanics (cash settlement vs. physical, valuation rule for “touch”), exact definition of when a touch is measured (e.g., tick rule, exchange quote), and any fees.
Risk management and practical considerations
– All‑or‑nothing payoff: buyers risk losing 100% of the premium; sellers face potentially large liabilities unless limited by collateral or hedging.
– Counterparty risk: many one‑touch contracts are OTC — check creditworthiness and collateral arrangements.
– Liquidity: these markets can be illiquid; secondary exits may be at wide spreads or unavailable.
– Model risk: pricing requires estimating touch probability. Misestimation of volatility or drift leads to poor decisions.
– Regulatory concerns: retail investors have been warned in some jurisdictions about exotic/binary options being overpriced or unsuitable. Exchanges and regulators (e.g., in the U.S. and Europe) have issued guidance and restrictions in the past.
Alternatives to a one‑touch option
– Vanilla call/put: if you want payoff linked to final price rather than just a touch.
– Barrier options with retention beyond touch: other barrier types (knock‑in/knock‑out) offer different payoff timing and conditions.
– Spread or structured products: combine vanilla and barrier options to tailor risk/reward and cap losses.
Checklist before trading a one‑touch option
– Do I have a clear, time‑bound thesis that a level will be reached?
– Can I estimate a realistic probability of the touch?
– Do I understand the exact trigger definition and settlement rules?
– Is liquidity sufficient to allow exit if needed?
– Have I assessed counterparty credit and regulatory status of the venue?
– Is the potential loss (the premium) acceptable relative to portfolio size?
Example exit strategies
– Buyer: sell the contract if its market price rises to lock in profit as the underlying approaches the barrier, or exit if the underlying moves away and the premium falls.
– Seller: hedge by purchasing the underlying or vanilla options as the barrier becomes more likely to be breached; close the position early if the market makes touching too probable relative to desired risk budget.
Regulatory and availability notes
– One‑touch and other binary/exotic options are less commonly traded by retail investors and are typically negotiated by institutions. Many regulators have cautioned that exotic binaries can be mispriced and unsuitable for unsophisticated investors. Availability varies by jurisdiction and platform; always verify the legal standing and protections provided by the trading venue.
Conclusion
One‑touch options are a focused, binary way to profit when you expect a price level to be touched within a given time window. They are relatively straightforward to understand in payoff terms but require careful pricing judgment, strict risk sizing, and attention to liquidity and counterparty risk. For most retail traders, simpler instruments or combinations of vanilla options may be preferable unless they have access to transparent pricing and a clear edge in estimating touch probabilities.
Sources and further reading
– Investopedia, “One‑Touch Option” — https://www.investopedia.com/terms/o/onetouchoption.asp
Disclaimer
This summary is educational and not investment advice. Consider consulting a licensed financial professional before trading complex derivatives.