One Touch & Double One Touch
One Touch and Double One Touch options are American-style digital options with Europeanstyle payment. This is the big difference with traditional digital options, with One Touch, the target price (or barrier) only needs to be touched once to generate payoffs, the payment is made at maturity. The premium paid will therefore be higher for a One Touch compared to a
traditional digital option. The graph below illustrates the One Touch option payoffs:
Here, the investor has an advantage in dealing with these options because they guarantee attractive payoffs if the strike price is touched or exceeded during the life of the option. The payoff is equal to the rebate minus the premium paid at the purchase of the option. Double One Touch (DOT) options work in the same way as One Touch options except that there are two target prices, meaning that to generate a payoff, the market price of the underlying asset must touch one of these two prices.. In addition, the premium paid is not the same for a Double One Touch option as for two One Touch options. Buying two One Touch options is more expensive than buying one Double One Touch option. The delta of a One Touch option is highly dependent on the implied volatility and the time to expiry. The closer we get to maturity, the more the delta becomes positive for a One Touch with an upward barrier and negative for a One Touch with a downward barrier if the price of the underlying moves closer
to the determined barrier. If the strike is hit, the delta will be equal to zero. The lower the implied volatility and the shorter the maturity, the faster the delta will move. It will become positive for a One Touch Call (with Barrier or Strike rising) and negative for a One Touch Put (with Barrier or Strike falling). Gamma and vega movements for One Touch options also depend on implied volatility, maturity and the strike price. The inference is that an option increases in value when it approaches the strike price during its life and that at (or before) maturity it hits the strike, the payoff will be capped and will not change regardless of spot
movements. The vega is always positive and as volatility increases, so does the chance of hitting the strike price. OT and DOT options can be useful in hedging purposes, such as the hedge of a vanilla strategy like a Straddle, a strangle, or an iron condor. Moreover, they are also used as speculative positions or directional trades.
Written on 07/12/2020