One-touch options

As one of the most popular exotics, the one-touch option is profitable if the price of the currency pair touches a specified price within a certain period of time.

Let’s say the Euro/U.S. dollar pair (EUR/USD) is trading at 1.2900. A trader could buy a 1.3000 one touch option expiring in two days for 45 percent of payout. In this case a trader would pay $45 and if price reached 1.3000 he would receive $100, or a 122-percent return on his trade ($100 payout - $45 premium = $55; $55/$45= 122 percent). Timing is especially critical with exotic options. You must know the exact time of expiration, and each broker may have different cutoff conventions.

Typically, exotic options are timed against the New York cutoff, which is 10 a.m. ET. However, some brokers will set the cutoff time at 24:00 GMT (4 a.m. ET), so confirm the time before making a trade.

One-touch options are suited for conditions when you have a strong opinion about the direction of a currency pair and you are convinced the move will happen soon. A one-touch option with a far-away target (perhaps 200 pips away) and a very short time span (24 to 48 hours) will have a very high reward-risk ratio (typically 3:1 or less) precisely because the payout on such a trade will be rare.