A Quick and Simple Guide to No Touch Options
So you’ve decided to tread the boards of binary options trading. You’ve found a great binary options broker to work with, but are a little confused about all the different types of options. Don’t let it keep you up at night, because they are all really simple. And once you’ve analyzed the names, you’ll soon appreciate what they are all about. But to save you too much worry, we’re about to introduce another type of option for your convenience.
Binary options are a financial option that has two possible payouts, a fixed amount of money, or nothing at all. Binary options trading has become a very popular form of investment, particularly for those with very little financial experience. This may be because the most common form of option is a 50/50 bet on whether the price of an asset will change. There are, however, a number of other option types including no touch options.
What are no touch options?
If you’ve already read our introduction to one touch options, no touch options are basically the opposite. When you use this type of instrument you are simply betting that the price of an asset doesn’t reach a certain level, before expiry of the contract. Like the traditional type of option, the call-put option, there are only two possible outcomes. You either win or lose, but either way these outcomes are fixed.
When is the best time to use a no touch option?
Whatever trader you talk to they will each have their own preferences for the type of option. Aside from payout ratios, and pure mechanics, many traders choose to use different binary options according to market conditions. One touch options are better when a trader is convinced an underlying asset’s price will go up or down, but they aren’t sure whether it won’t return to the original price. A call/put option won’t be the right type to choose as there is a high chance the asset will reverse before expiry, which means the trader will fail to be in the money. A no touch option, however, is often purchase when the market is expected to consolidate in a narrow range. This often happens after a price has achieved a new high r low. The trader, in this case, is betting that the trading session will be quiet.
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Let’s give you an example to better explain what happens.
Say, for example, you want to purchase a no touch option on coffee. Currently, the price is $30.45 and your chosen binary options broker has offered a no touch option with a price of $30.60. If coffee manages to stay below $30.60 for the specified length of time, the option will expire and the trader will be in the money, meaning they make a profit. Alternatively, if the price rises and manages to hit $30.70 the option will be out of the money and the trader will suffer a loss.
A no touch binary option offers higher returns the closer the trigger is. For example, if coffee is trading at $35, a trigger price of $35.50 will pay out more than a trigger of $36.00. This is because the chance of hitting a closer target is higher. However, this also means that the risk for the option becoming out of the money is greater too.
There is another type of no touch option, which is a double no-touch option.
What is a double no touch option?
This when a trader has an agreed payout if the price of an underlying asset doesn’t reach or surpasses one of two predetermined barrier levels. Should you decide to use this type of option you will pay a premium to your chosen binary options broker. You’ll get the right to choose where the barriers sit, the expiry of the instrument, and the payout you can expect to receive. The maximum amount you could lose will be the cost of setting up the option.
Double no touch option will be useful if you believe the price of an underlying asset will stay range-bound over a certain period of time. And they are becoming very popular among traders in the Forex market.
What are the advantages of no touch options?
Simple and intuitive to use – You don’t necessarily need to be a financial wizard, and many traders readily admit that intuition and luck have often helped this type of options trading.
Keep up to date with global financial news – While luck and gut feeling can play a part, there is nothing that will match the perspective you can get from keeping an eye on the global financial world, and economic news in general. Reading the latest Forex news will keep you aware of the movements, events, and changes and is possibly the best strategy to adopt.
Good analytic skills will be a bonus – Luck and intuition is no guarantee of success. More experienced and successful traders has great analytical skills, and a thorough understanding of financial worlds. So there is something to be said for gaining some knowledge.
Close predictions win big – The closer you can make an estimate to the closing price of an asset, the greater your winnings will be.