How To Invest in One-Touch Options

Summary:

When the spot rate of an option reaches the strike price before its expiry date, it is known as a one-touch option – the holder of the option receives a premium. With the pointers outlined in this blog, one-touch options should become an easy investment avenue for even the newest trader.

Introduction to one-touch option

When the spot rate of an option reaches the strike price before its expiry date, it is known as a one-touch option. When this happens, the holder of the option receives a premium. This can be at any time before the expiration of the option. In comparison to barrier or double one-touch options, these are relatively not as expensive. Usually, small traders do not trade in one-touch options.

Overview of one-touch options:

For a one-touch option, the investors/traders choose an expiry date, target price and premium that will be received when the target price is achieved. In comparison to ‘puts’ and ‘calls’, a simple yes-or-no prediction for a one-touch option allows investors to profit.

In the event a one-touch option is opted for, there can be one of the following two outcomes:

1. The target price that was predicted is reached and the investor gets the premium that he is entitled to. Along with that, he also gets the payout that had been agreed upon.
2. The target is not reached and the investor ends up losing the premium that was paid in order to open the trade

Just like usual put and call options, one-touch call options can be brought to a close before the expiry date at a loss or profit, depending on how proximity of the underlying asset or market to the target price. This sort of trade is usually beneficial for traders who are convinced of the outcome and know that the price will reach a certain level. Because the outcome is binary (yes or no) it is not as expensive as other exotic options such as barrier options and double one-touch options. Usually, some traders tend to shy away from these options because of the risks that are associated with them.

Objectives of one-touch options:

The main goal of one-touch options is to give traders the chance to profit from the specific price movements of an underlying asset. The following are some of the main features and objectives of one-touch options:

1. Speculating price movements: The main objective of a one-touch option is speculating whether the price of an underlying asset will be able to attain a certain pre-decided price level (the 'barrier' or 'trigger' level) before the option expires. Traders try to predict whether the price will reach or 'hit' that level at least once during the lifetime of the option.
2. Simplicity: These options are more or less simple to comprehend and trade, making them accessible to different types of investors, even those who are new to options trading.
3. Capacity for high returns: These options usually offer higher returns in comparison to traditional options. If the underlying asset’s price touches or exceeds the predetermined level, the option provides a fixed, substantial payout.
4. Limited risk: Investors are aware of the possible upfront losses that they may face when they opt for a one-touch option trade. If the price is not able to touch the barrier level before it expires, the option expires worthless. Consequently, the trader loses the premium that was paid to purchase the option.
5. Hedging and diversification: Investors often use one-touch options as part of a wider trading or investment strategy to diversify their portfolios or hedge against other positions. For example, a trader with a long position in an asset might purchase a one-touch option with a barrier level that is below the current market price to have as a buffer against in case of a downward move.
6. Event-based trading: These options are sometimes used for trading strategies that are event-driven. This is when they anticipate significant price movements based on news releases or upcoming events. If an event is expected to cause a sharp price change, investors may utilise one-touch options to profit from that specific move.
7. Risk management: Traders often use one-touch options as a means for risk management to restrict losses and enhance potential gains. This can be done when there is a degree of certainty with which movements in underlying assets can be predicted. If it seems possible that an option has a high chance of reaching a particular strike price, it bodes for an investor to use it as a one-touch option to augment earnings.

Summing up

Despite the numerous benefits of one-touch options such as high returns, less risk and diversification, traders still need to exercise caution when investing in them. Factors such as market volatility and the distance of the target price from the existing price are things that need to be taken into account. If you are somebody who is just starting out, consider making it a part of a wider investment strategy to mitigate losses and earn more, instead of just a quick way to earn fast returns. With that in mind and the help outlined in this blog, one-touch options should become an easy investment avenue for you.