Definition
A One-Touch Option is a type of financial derivative instrument that pays out if a certain level or target price is hit at least once by the asset during the option’s lifetime. It is a type of binary option as it offers only two outcomes, either the asset hits the defined price, thereby paying out a fixed amount, or it doesn’t, resulting in the loss of the initial investment. Unlike standard options, it does not matter if the asset stays at this level, as the payout is based solely on one instance of reaching the target price.
Phonetic
The phonetic spelling of “One-Touch Option” is: wʌn-tʌch ɑp-ʃən
Key Takeaways
- A Predictive Investment Tool: The One-Touch Option is primarily a type of investment tool that allows the investor to predict whether the price of an asset will reach the predetermined rates at any point before the agreed expiry time.
- Higher Payouts: Compared to other trading options, One-Touch Options can provide better payouts. They offer higher potential returns, making it attractive for investors who are willing to take a higher risk.
- Weekend Trading: One unique characteristic of One-Touch Options is that they can be traded over the weekends when traditional markets are closed. This provides opportunities for traders to profit even during non-standard trading hours.
Importance
A One-Touch Option is an important business/finance term predominantly used in the field of binary options trading. It plays a crucial role as it is a specific type of contract that pays off if the asset price touches a pre-established level at any point before the contract’s expiration date. This makes it attractive to investors and traders by offering potentially higher pay-outs compared to conventional options. Given its structure, a one-touch option can provide a return even if the market is unpredictable or stagnant. It can be particularly useful when an investor believes that a stock will move significantly, but is unsure of the direction of the move. The one-touch option thereby presents a strategic opportunity in the financial markets, directly linked to risk management and capital efficiency.
Explanation
A One-Touch Option serves as a type of contract used in financial markets that pays off if the underlying asset reaches or surpasses a predetermined price at any point during its lifetime. The purpose of this investment tool is to provide investors an opportunity to speculate on whether an asset will reach a certain price at any time prior to its expiration. It grants a payout to the holder of the option if the market price of the underlying asset reaches or surpasses a selected barrier.One-Touch Options are predominantly used when a trader deems that the underlying asset price might exhibit a significant move in a particular direction, but is unsure of the extent of the move. These options can be bought on weekends when the markets are closed and they offer high returns if the market touches the strike price at any point during the trading period. Thus, investors use it in circumstances where they wish to profit from potential large price movements or high volatility, but also want to limit their risk.
Examples
A One-Touch Option is a type of contract used in trading that pays off when the underlying asset reaches a certain price at any point before the contract expiration time. Here are three real-world examples:1. Forex Trading: A foreign exchange trader might use a One-Touch Option if they believe that the price of a specific currency pair like USD/EUR will touch a particular level at some point over the contractual period. If it does, they will receive a payout; if not, they stand to lose their investment.2. Commodities Trading: A commodities speculator may purchase a One-Touch Option contract on a commodity such as oil, predicting that the price will touch a certain level due to factors like geopolitical events or changes in production. The trader stands to profit if the price reaches that level at any point before the option’s expiration.3. Cryptocurrency Trading: A crypto investor might use a One-Touch Option if they predict Bitcoin or other cryptocurrencies will touch a certain price level due to market volatility. If the desired level is hit within the contract’s lifetime, the investor will make a profit on their One-Touch Option, regardless of the price at the option’s expiration date.
Frequently Asked Questions(FAQ)
What is a One-Touch Option?
A One-Touch Option is a type of derivative financial instrument used in trading, specifically in binary options. It is a contract which pays out if the price of an underlying asset touches a predetermined barrier – at least once – before the option expires.
How does a One-Touch Option work?
A trader selects a barrier (price level) that the underlying asset must either touch or surpass within a stipulated timeframe for the trade to be deemed profitable. If the barrier is reached, the trader receives a preagreed payout; if it isn’t reached, the trader doesn’t get a payout.
What are the potential benefits of One-Touch Options?
One-Touch Options can provide high potential payouts compared to regular binary options. They also provide a payout even if the asset only momentarily touches the barrier, which might not be the case in regular trading.
Can you lose money with a One-Touch Option?
Yes, a One-Touch Option is a high-risk investment product, meaning you can lose the entirety of your investment if the underlying asset fails to touch the set barrier before the option’s expiry.
How do you choose a barrier for a One-Touch Option?
The choice of barrier depends on a trader’s market outlook. If they believe that significant price movement is likely, they may choose a far-off barrier. If they foresee minimal price movement, a close barrier may be chosen.
What kinds of assets can I trade with a One-Touch Option?
Most commonly, One-Touch Options are used for trading currency pairs in the forex market. However, they can also be used for commodities, stocks, indices, and any other tradeable asset, depending on the broker’s offering.
Can I trade One-Touch Options any time of the day?
One-Touch Options are typically offered at certain specified times, including on weekends, when traditional markets may be closed. However, availability may vary depending on the broker.
Can beginners trade One-Touch Options?
While beginners can trade One-Touch Options, they require a good understanding of the market and the specific asset being traded. Due to their high risk, they are better suited to experienced traders.
What strategies can be used while trading One-Touch Options?
Traders often use technical analysis, historical data, and market trends to predict whether the price will touch the barrier. Each trader might develop their own unique strategy based on their analysis and risk tolerance.
Related Finance Terms
- Binary Option: A type of financial derivative based on a simple yes/no proposition.
- Barrier Option: A type of option where the payoff depends on whether the price of the underlying asset reaches a certain level during a specific period.
- Straddle Strategy: A strategy used in trading and investing that involves simultaneously buying a call option and a put option on the same underlying asset with the same strike price and expiration date.
- Exotic Option: An option which is more complex than commonly traded vanilla options due to the option’s unique features or rules.
- Knock-Out Option: A type of option that becomes worthless if the underlying asset price reaches a certain barrier during its life.
