No Touch & Double No Touch Options (NT & DNT)
No Touch (NT) options are similar to One Touch options; however, No Touch means that the strike price must not be touched otherwise the option will be equal to zero plus the premium paid to purchase the No Touch. In this situation, the investor will make a loss. If, on the other hand, the strike price is not affected, the option will generate a positive payoff. For example, let’s take an investor who buys a No Touch option with the Eurostoxx 50 Index as underlying, at a price of 4200 points and a strike price of 4400 points, for a 6-month maturity. If the price of the underlying touches or exceeds 4400 points in the next 6 months, the option will have a value of zero.
The payoffs of a NT option type are shown below:
It is therefore clear that the strategy loses out when the exercise price is exceeded. No Touch options are American options with European-style payout. Double No Touch (DNT) options work like traditional No Touch options, except that the latter includes two strike prices. In the case of a Double No Touch, the price of the underlying asset must remain between the two target prices for the option to be in the money. If one of the two prices is touched, the value of the option will be zero and the investor will therefore suffer a loss because of the premium paid for the Double No Touch. As with the One Touch and Double One Touch options, delta and gamma can become very important as they approach one of the barriers and are therefore more difficult to cover as maturity approaches. Once one of the two barriers is touched or crossed, the delta is then equal to zero.
The payoffs for a DNT option are illustrated below:
