Introduction

When you begin exploring the share market, you will come across many instruments with varied risk appetites requiring different investment strategies. Some focus on a passive approach for long-term growth, while others can seem tricky yet rewarding. One-touch options come under the second category. They let you capitalise on the anticipated price movements if you know the definitive timeframe. Read on to learn everything you need to know about one-touch options.

What are one-touch options?

In one-touch options, you can select the target price and premium and the timeframe when it will expire. If you turn out to be right, you will receive a premium along with the payout. Just the act of 'touch' at the specific timeframe triggers the payout, hence the name. The price does not need to continue to stay at the same level. You only need a 'yes' or 'no prediction for this type of one-time investment in the share market. Thus, the one-touch option is cost-effective. You can trade in it if you're confident in predicting the one-touch pricing within a set period.

How one-touch options work

When you invest in a one-touch option, you will select these components:

• Underlying Asset: The stock, currency, commodity, or any other financial instrument upon which the option is based.

• Barrier Level or Target Price: The specific price point that the underlying asset must reach for the option to pay out.

• Expiration Date: The date by which the underlying asset must touch the target price.

• Premium: The cost at which you purchase the option.

• Payout: The fixed amount you stand to receive when the barrier level (target price) is reached.

There are two outcomes you can expect:

• The option reached the target price you speculated, and you get the premium along with the payout that you agreed to.

• You are short of reaching the target price at the predetermined timeframe. As a result, you lose the premium you paid to open the trade.

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One-touch option pricing

Several factors influence the one-touch option pricing:

·  Underlying Asset's Current Price

The underlying asset's price being close to the target or barrier level is a good sign. The closer it is, the higher the option's premium you can set. This is because the likelihood of the current price touching the barrier increases.

·  Expiration

A longer duration provides an increased opportunity for the asset's price to reach the target price. This affects the option's cost and leads to higher premiums.

·  Market Volatility

When the market is volatile, the asset's price is more likely to hit the barrier, which again, results in a higher option premium.

·  Interest Rate

The prevailing interest rates can impact the present value of the option's payout. This, in turn, affects its pricing.

·  Proximity to Barrier Level

If the current price is closer to the barrier level, the premium is higher and vice versa. This is because it hints towards reaching the barrier.

Strategies to invest in one-touch options

You require a strategic approach for making a one-time investment in the share market through one-touch options. Some of them include:

·  Market analysis

A thorough technical and fundamental analysis to predict potential price movements of the underlying asset. This also involves identifying trends, support and resistance levels, and upcoming opportunities to get insights into the possibility of reaching the barrier level.

·  Event-driven planning

You can anticipate certain market reactions based on how the economy behaves at a macro level. Some events like earnings reports, economic data releases, geopolitical developments, etc. are examples. Suppose a company is expected to announce favourable earnings, then may purchase a one-touch option with a barrier set at a price that reflects the market movement you anticipate.

·  Volatility assessment

It is best to invest during periods where you expect high volatility. This is because price swings increase the chances of reaching the barrier level. This is true for other assets in the derivatives market, which thrive on market movements.

·  Diversification

You want to make one-touch options a part of your broader portfolio. This way, you can diversify risk or hedge existing positions. For instance, if you are holding a substantial position in a particular stock, you can use a one-touch option to hedge against the potential adverse price movements.

·  Risk management

As one-touch options are all-or-nothing in nature, you want to be prepared for risks. You can do so by allocating only a portion of the investment capital to your selected options and setting clear limits on potential losses.

Conclusion

One-touch options are a unique avenue to profit from anticipated price movements in the share market. Once you understand the nuances of one-touch option pricing and employ the right strategies, you can effectively add this derivative to your portfolio. The key is to understand the nitty-gritty of the comprehensive market and manage risks accordingly. Ensure the one-touch option aligns with your financial objectives.

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