One-Touch Option: Definition, How It Works, and Key Considerations
What is a one-touch option?
A one-touch option is an exotic, path-dependent derivative that pays a fixed amount if the underlying asset reaches (or “touches”) a predetermined price level at any time before expiration. If the touch never occurs, the buyer loses the premium paid to enter the contract. Payouts are typically cash-settled.
Key points
- Pays a fixed payout if the underlying reaches the strike/barrier at any point before expiration; otherwise the buyer loses the premium.
- Offers a simple yes/no exposure to whether a target level will be reached, rather than exposure to the asset’s final price.
- Generally less expensive than some other exotic/binary options but often traded mainly by institutions.
- Can usually be closed before expiration; value moves with the probability of touching the barrier.
How it works
- Buyer pays a premium for the contract and specifies a target (strike/barrier) and expiration.
- If the underlying hits the barrier at any time before expiration, the buyer receives the agreed payout.
- If the barrier is never hit, the buyer forfeits the premium.
- Because the option depends on whether the barrier is touched at any time, it is path-dependent (the intermediate path matters, not just the final price).
Example scenarios
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Price approaches the target
A trader buys a one-touch contract on the S&P 500 that pays $100 if the index rises 5% within 90 days. The trader pays $45 per contract. If the index moves nearer to the 5% target early in the period, the contract’s market value typically rises and the trader can either sell for a profit or hold for the payout if the barrier is touched. -
Price moves away from the target
If the index falls after the trade is placed, the probability of touching the target before expiration drops, lowering the option’s market value. The trader can sell at a loss or hold in case the market recovers.
Comparison with other options
- Versus vanilla calls/puts: Vanilla options pay based on final price relative to strike; one-touch options pay on the event of touching a barrier at any time. One-touch is simpler for bettors on whether a level will be reached.
- Versus double one-touch / barrier options: Double one-touch requires touching either of two barriers and can have different payoffs; barrier options can be knock-in/knock-out and have more complex triggers. One-touch is typically less complicated and less costly than some double or multi-barrier structures.
Advantages
- Clear, binary-style payoff for a single event (touch or no touch).
- Often cheaper than more complex exotic/binary contracts.
- Useful when you expect a level will be breached at least once but don’t care whether it stays there.
Risks and limitations
- Total loss of premium if the barrier is not touched.
- Pricing and liquidity: many one-touch contracts are traded between institutions; retail access can be limited, pricing may be unfavorable, and liquidity thin.
- Counterparty and regulatory risk: exotic derivatives can carry counterparty exposure and have drawn regulatory scrutiny in some jurisdictions.
- Hedging and replication are more complex than with vanilla options.
When traders use one-touch options
- To express a directional, event-driven view that a particular price level will be reached within a set time frame.
- When a trader wants a defined payout for the event rather than exposure to the asset’s final price.
- Typically by more sophisticated or institutional traders due to availability and pricing considerations.
Takeaways
A one-touch option is a straightforward way to bet that an underlying will hit a specified price before expiration. It offers a fixed payout for that event and otherwise results in loss of the premium. It can be cost-effective for a simple yes/no market forecast but carries liquidity, pricing, and counterparty considerations that make it more common among professional traders than small retail investors.