For those of you who have been trading options for sometime, you may have come across a One Touch Binary Option.
These are indeed quite interesting financial instruments and they allow for some pretty unique binary option strategies for traders to take advantage of.
They also allow the binary options trader to generate pretty large payouts. One touch options are usually much higher in strike than those of traditional high / low options.
We will take a look at some really interesting binary options one touch strategies that the trader can implement on a number of underlying assets.
Before we can do this, we need to take a look at the fundamentals of a one touch binary option.
What is a One Touch Binary Option
A one touch binary option is an exotic variant that will pay the trader out the profit from the trade if the price of the asset goes above or below a certain touch “level”.
This is in contrast to a traditional high low option that is merely a trade on whether the asset will go up or down in price over the life of the option. If you want to spruce up on your understanding on the topic, we have explained binary options previously.
You can have a one touch binary PUT and CALL option. Essentially, the one touch CALL will payout once the price of the asset has hit a particular level that is above the current asset price.
In contrast, the one touch Binary PUT option will only payout the trader if the price of the asset falls below a certain level.
It is also important not to confuse a one touch option with a Knock-in-option. A Knock in Option is a trade where the option will only begin once the level has been met.
A one touch option is the opposite where the trade starts at the outset and the trader will get paid out if it hits that level.
Given that one touch trading requires that the price of the asset is to hit a particular defined level, this allows the payoff in the event of a correct prediction to be as high as 500%.
Why the large payout you ask?
This is mainly due to the nature of the risk management at the broker. When they have traders who are trading normal high / low options, the broker knows the trades could roughly cancel each other out.
When it comes to a one touch option, the chance of reaching the one touch level is much lower than either the price going up or down. This is why the broker is able to offer such high returns.
One Touch Trading Strategies
One touch binary options are indeed the perfect instrument to use when one is using a technical binary option strategies.
Technical analysis is all about trading levels, and this is exactly what one touch binary options use as the determining factor in the payout.
Technical analysis will allow the trader to determine how likely the asset is to breach the one touch level and end up in the money.
There are a number of different technical analysis signals and trading indicators that you can use to formulate your opinion of likelihood, but we will look at 3.
RSI and Volume
When it comes to technical trading, two of the most important indicators that the trader will monitor is the volume and the RSI.
Volume is an indication of how much buying / selling is going on in the market. It is the total value of all transactions that are taking place.
Why is Volume so Important?
It is because volume is generally able to provide momentum to positive / negative price trends. If the price is going up and there is strong volume, it is likely to continue. The same can be said for negative price trends.
When it comes to the RSI indicator, it is best used for identifying if a level is “oversold” or “overbought”. It is a statistical indicator that has been used by technical traders for years.
For the RSI indicator, when it is above 70, this is usually considered an “overbought” level and when it is below 20 it is considered an “oversold” level.
Let us take a look at an example. In the below chart we can have the GBP/CAD cross. As you can see, the RSI indicator was showing an oversold level just after a large fall.
After this fall, there was a slight increase in the price and the volume had increased as well. This is an indication that momentum appears to be on the upside.
If the trader wanted to enter a one touch CALL option trade, they could target a level given in the chart. In this case, it is more likely that the price will hit the one Touch level and payout the trader.
We have previously covered binary Bollinger band strategies and they are very effective for traditional high low trading.
However, when trading one touch options, Bollinger band indicators can be a really powerful tool in your toolbox.
Why is this so?
Bollinger bands are great indicators to help the trader identify resistance and support levels. They incorporate moving averages as well as volatility.
This means that Bollinger bands are helpful to determine whether a price has reverted from the mean. Statistically, this is essential to determine the likelihood of hitting the one touch level.
Essentially, if the price has broken through a resistance or support level, then it is likely that it will continue on its current trajectory past the levels.
We will take a look at a simple example on a SpotOption platform. We have plotted the 2,20 Bollinger bands (industry standard) around the FTSE 100 index.
As we can see in above image, the price of the index has breached the lower Bollinger band which is considered a bearish indicator.
This means that the trader should consider entering a one touch 20 minute PUT option which is much lower than the current level. This is in the expectation that the price will continue to fall.
Indeed, as we can see, the downward trend continues given the initial break that we saw below the lower Bollinger band (support level).
In this case the trader would have generated a sizeable return on their investment as the one touch level was considerably below the entry point.
The Moving Average Convergence Divergence (MACD) is another really important technical indicator that is offered by nearly all brokers.
What is the MACD?
It is another momentum indicator that uses two moving average indicators to give a sense of how entrenched a trend is.
The MACD is calculated as the difference between a short term moving average indicator and a long term moving average indicator.
When it is positive it means that the short term moving average is above the long term and the trend is positive and it is a bullish indicator. The opposite can be said for a negative MACD.
Taking a look at an example, below we have the MACD plotted for the CHF/HUF forex cross. You can see that the shorter term Moving Average (12 period) is above the long term moving average (26 period) and hence the MACD is positive.
This is an indication of a bullish trend and as such means that the pair is likely to continue climbing. The trader should consider entering a 20 minute CALL one touch binary option.
If the trader had done this at the first entry level with a 10 minute expiry, then the option would have hit the one touch boundary and paid out the win rate.
Trading one touch binary options can indeed generate the trader a much larger return than is possible with normal High / Low options.
Yet, there is a reason for this.
It is a risk return payoff. The chance of reaching the one touch level is less likely than that of the option just either up or down.
That is why you can’t treat one touch options in the same way that you do High / Low binary options. You should only enter the trade when you have a reasonably strong conviction that there is positive momentum behind the price movement.
If you have found that trading one touch binary options has been a reasonably profitable experience for you then there are one touch binary option variants that could be of interest.
There are no touch binary options which are merely the opposite of a one touch. They will pay out if the price of the asset does not touch a level.
There are also tunnel options which can be a combination of one touch and no touch options. These will pay the trader if the price remains in or goes out of a certain tunnel range.
Lastly, there is a new instrument which is currently on the market which is called a digital contract. Digital contracts are essentially a combination of a CFD instrument and a binary option and can have payoffs as large as 2,000%.