Posted in Finance, Accounting and Economics Terms, Total Reads: 418
Definition: Double No-Touch Option
It is also known as range binary option. In this type, there are two barriers or prices set for an option: one above the underlying asset and one below it. Also the time of the period for which the trade would be active is set.
Now during this time period, is the asset does not hit any of the barrier i.e. operate within the range, the pay-out is activated. The buyer of the option receives the stipulated payout specified as per the agreement on the delivery date in the base currency. Else, if any of the two barriers are hit, the payout is not initiated.
For this option, the investor has to pay some premium to the broker and thus get the right to choose the position of the barrier, the time of expiration etc. So here the maximum loss possible is the cost of setting up the option.
Nowadays, In Forex market, double no touch options are becoming really popular amongst traders. It is useful when the trader believes that the price of the option will remain in range bound over certain period of time.
For example: Assume that the current USD/Rupee rate is Rs 62 and the trader believes it will not change dramatically over next 15 days. So a trader can use a double no-touch option on it by setting limit from Rs 61 to Rs 63. Thus the trader here will make a benefit if the rate doesn’t change beyond the two set limits.