Double no-touch

The double no-touch option is the opposite of the double one-touch. It is appropriate for situations in which you anticipate a range-bound market and expect volatility to be low.

Large trend moves are often followed by periods of consolidation; the double no-touch can be a profitable trade to use in these cases. Assume the EUR/USD makes a strong up move from 1.2400 to 1.3400 over several weeks, but price then pauses and starts to weaken a bit. A trader could buy a double no-touch from 1.3200 to 1.3600 with expiration in a week. If the market remains within these boundaries, the trader will walk away with a profit.

One-touch and no-touch options are highly time sensitive. A one-touch will be significantly cheaper the less time there is to expiration because the odds of reaching the target will be greatly reduced, while a no-touch will be priced in opposite fashion because the chances of not touching the target will diminish the more time is left on the contract.

However, the double one-touch and double no-touch options will have the same pricing parameters in terms of time but will vary greatly with respect to the width of the barriers. Double one-touch options, for example, will become progressively more expensive as the barriers narrow.

Recent pricing in double one-touch options in the U.S. dollar/Japanese yen rate (USD/JPY) with 10 days to expiration and the spot rate trading at 104.75 were as follows: For strike barriers between 103.50 and 105.50 (meaning price had to hit either one of those points for the option to pay out), price was an eye-popping 95 percent of payout, offering the trader only a potential 5-percent gain against a 95 percent loss.

Expanding the boundaries to 102.50 and 106.50 reduced the premium to only 41 percent of payout. Conversely, the double no-touch options would have the exact opposite properties, offering much higher payouts as the strike prices narrowed.