A one-touch option is a type of exotic option (and a barrier option) in which the holder receives a payout once the price of the underlying asset reaches or exceeds a specific level or barrier. The holder of a one-touch option is entitled, at the outset of the option contract, to set the position, the time to maturity and the payoff once the option touches the barrier. In case the barrier is not reached, the holder receives nothing, and therefore loses the premium paid to the option writer.
The main uses of one-touch options are as follows:
- Speculators use these options as bets on a rising or falling underlying rate/ price (e.g., an exchange rate, a commodity price, etc.)
- Hedgers trade one-touch options as a rebate in order to secure a profit in case the trade or position doesn’t work out.
- Structurers can embed these options in structured products to enhance returns on forward rates, including interest rates.
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