A one touch option is a binary option that has a payout profile in which the investor can earn a significant returns based on the initial investment. The one touch option can have a return profile that is as low at 65% return on your initial investment, and in some cases a 500% return on your initial investment. A “one touch” option is a binary option that pays off if the underlying asset reaches a specific level, by a specific time. For example, a “one touch” option listed currently on “AnyOption” pays 180% if oil prices touch $89 dollars a barrel by September 4, 2010.
Prior to investing in a “one touch” option, an investor should determine if this method of trading is in line with their risk profile. An investor who is interested in trading “one touch” options can use a couple of methods to determine is “one touch” options are fairly priced given the value of underlying options. “One touch” binary options are priced using the same assumptions that are used for trading vanilla options. The different is that the model use to determine the value of a “one touch” option is different. The key component to pricing both vanilla and binary options besides the underlying price of the asset is the implied volatility of the underlying asset.
Implied volatility is how much the market believes an underlying asset will move during the life of the option on an annualized basis. For example, S&P 500 traders believe that the SPY ETF (which mimics the movement of the S&P 500 Index) will move approximately 15% on an annualized basis. This component is used in a standard Black Scholes pricing model to price vanilla options, and the same component is used in pricing binary options.
An investor can purchase their own binary option model to determine if the pricing of the binary options are rich or cheap. Different brokers or market makers will use different models to price these instruments and this will create a different level for each type of binary option. There is also a way for an investor to ballpark the price of a “one touch” option to determine if it worth purchasing relative to a vanilla option. A trader could price a call spread option (if the price is currently above for the “one touch”, or a put spread for prices that are currently below) in which the return from the purchase of the call spread is equal to the payout for the binary option. Although this technique is very rudimentary, the pricing will give an investor a relative value level.
“One touch” options can be traded very profitably and there are numerous strategies that can be used to trade them to make very generous returns. An investor should test numerous strategies with specific instruments to find the best overall strategy that meets the investors risk profile.
