No Touch Binary Options
You have decided to enter into the world of binary options trading. You have found a binary options broker to work with, yet you remain a little confused over the different types of options to go for. They may seem complicated but the principles are relatively simple. The hard decision to make is whether these options are a better way to express your view in the market over traditional spot positions. Once you have become accustomed to the terminology and what they represent, you will understand what they are all about. To save you time, we will cover the main points to consider, not only to extend your knowledge on binary options, but also to determine whether they offer better value over trading the underlying assets in the spot market.
Binary options are a type of option that has two possible payouts, a fixed amount of money, or nothing, zero, loss of initial investment (and no more). Binary options trading has become a popular, and particularly so for those with very little experience in the financial markets. This may be due to the common form of option – high/low, up/down – which is essentially a 50/50 bet on whether the price of an asset will go up or down. These common types of option may seem attractive over straightforward Forex, but as some have found out, they can be costly while offering limited rewards, when a buy or sell in the underlying asset would have returned you greater profit. There are, however, other option types of options which try to capture market moves of a different nature. One such are No Touch Options.
What are no touch options?
If you have already read our introduction to One Touch options, you will have understood the idea that these options pay out a fixed amount when a level is reached. A No Touch option is therefore the opposite and pays out a fixed amount if the underlying does not reach (or touch) a pre determined price level agreed at the outset. In essence, when you use this type of instrument, you are simply ‘betting’ that the price of an asset does not reach a certain level before the end of the contract period or expiry. Like a traditional binary option, there are only two possible outcomes – you either win or lose, but either way, the outcomes are fixed from the outset.
When is the best time to use a no touch option?
Many traders will have have their own preferences for using a certain type of binary option – if at all. Aside from payout ratios, and the pure mechanics (ie set risks and reward), traders will choose to use different binary options according to various market conditions. For example, One touch options will be used when a when a trader is convinced that underlying asset price will go up or down, but are not sure whether prices will hold at their expected levels. In this instance, if you are monitoring your trades, depending on the payout ratio offered, you may be better placed to trade straight forward Forex and set a stop loss equal to the amount of the cost of the option. For comparison, a a call/put option will offer even less value if you believe there is a high chance the asset will reverse before expiry. In this case, the trader will lose the cost off the option price he/she has paid. A No touch option is often chosen when the market is expected to consolidate in a narrow range. This can happen after a sharp move, or over a holiday period. As such, the trader is betting that the trading session will be quiet. However, even in quiet times, sudden news can jolt the market, so No Touch strikes will have to be some way off current market to give you a chance to ‘win’. In this case, the payout percentage will be low, so you have to consider this against a range trading strategy in the spot market, which can be more effective and profitable, especially when considering the price of an option.
Let’s give you an example to better explain what happens.
Say you want to purchase a no touch option on the price of coffee. Currently, the price is $30.45 and your chosen binary options broker has offered a no touch option with a strike price of $30.60. If coffee manages to stay below $30.60 for the specified length of time of the contract, the option will expire and the trader will be in the money, meaning they will receive a payout. Alternatively, if the price rises and manages to hit $30.70, the option price is triggered and (is therefore out of the money) and the trader will suffer a loss as he/she receives no payout and loses the cost of the option price paid.
A No touch binary option offers higher return the closer the trigger (or strike) is placed in relation to the current price. If coffee is trading at $35, a trigger price of $35.50 will pay out more than a trigger of $36.00. This purely down to the fact that the chance of hitting a closer target is higher and therefore the payout is more. In turn, this also means that the risk for the option becoming out of the money (or worthless) is greater too. As attractive as some of the payout rewards may seem, in risk terms, they do not offer great value as the market can cover shorter distances and trigger your option ‘out of the money’ very quickly. Some traders have realised this and have decided that spot trades offer better rewards when using disciplined stops.
As well as No touch option, one can also trade a Double No Touch option – also known as DNTs.
What is a double no touch option?
A Double No Touch option (DNT) is a contract which pays out a set amount when a trader has agreed price of an underlying asset does not reach or touch one or other of two predetermined barrier levels either side of the current market. When you choose this type of option, you pay a premium to your chosen binary options broker based on the barrier levels set and length of expiry. If the price remains inside the set limits over the contract period, payout is received. If not, the maximum amount you lose is the cost of the DNT option.
A Double No Touch option is useful if you believe the price of an underlying asset will stay range-bound over a certain period of time. As popular as they have been among traders in the Forex market, they carry the same risks and limitations to rewards to the ones mentioned above. Sudden movement in price can render them worthless, while a good payout ratio will require narrower limits.
What are the advantages of no touch options?
They are by their nature, simple to use and it does what it says. You do not need to be a financial wizard to understand the terminology or how they work.
If you are convinced that there is a period of time that the market will be quiet, and that price will be contained, then this option type can be useful. Even so, it is advised to keep up to date with global financial news. Reading the latest Forex news sites will keep you aware of data and events.
Good analytic skills are naturally a bonus. If you are convinced that certain levels are strong enough to hold, you can express this through No Touch or Double No Touch options.
Barriers or strike levels which are close can offer great payout offers. However, they are high payouts for a reason.
This leads us to the disadvantages.
In order for the payout reward to be attractive, a trader will require trigger levels which are closer to the market. These, of course carry a greater degree of likelihood of being touched. The option is then worthless.
A trader may also choose to have a wider range of barriers which will have to be set of a longer expiry period. Again, the reward may be attractive, but in this instance, the costs may still be high and you may have to commit more of your funds to purchase this.
More funds used will leave you less to be able to trade other moves or developments in the market. Opportunities present themselves every day. This is where straight forward Forex is the better choice as it offers a trader the opportunity to cut or close the trade and change his view.
Spot trading in the traditional markets therefore offers you much more flexibility and does not tie up your trading funds. Plenty therefore to consider when deciding to use binary options.