Content area
Full text
A one-touch option, otherwise known as an American digital option, is a binary structure that results in a payout if the underlying asset reaches or surpasses a predetermined barrier during the life of the trade.
Introduction
A one-touch option, otherwise known as an American digital option, is a binary structure that results in a payout if the underlying asset reaches or surpasses a predetermined barrier during the life of the trade.
At the start of the trade, a payment will be made by the party that is long the option. There are two possible outcomes:
* Barrier is breached; a payment is made to the long investor on that date.
* Barrier is not breached; no payment is made (premium is lost by long investor).
The chart below shows an example payoff for a one-touch option. This particular example shows the payoff for an investor selling a one-touch option with a strike that is higher than spot, although investors can obviously both buy and sell one-touch options to the upside and to the downside. The trade is normally quoted in percentage terms, i.e. investors can receive 60% of a EUR100 notional for taking on the liability and selling the one-touch option, with a payment of 100% of notional being due in the...