Double One-Touch Binary Options Explained

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dbltouchbybls

Price double one-touch and double no-touch binary options using Black-Scholes option pricing model

Syntax

Description

Price = dbltouchbybls( RateSpec , StockSpec , Settle , Maturity , BarrierSpec , Barrier , Payoff ) calculates double one-touch and double no-touch binary options using Black-Scholes option pricing model.

Examples

Price a Double No-Touch Option

Compute the price of a double no-touch option using the following data:

Define the RateSpec using intenvset .

Define the StockSpec using stockspec .

Calculate the price of a double no-touch binary option.

Input Arguments

RateSpec — Interest-rate term structure
structure

Interest-rate term structure (annualized and continuously compounded), specified by the RateSpec obtained from intenvset . For information on the interest-rate specification, see intenvset .

Data Types: struct

StockSpec — Stock specification for underlying asset
structure

Stock specification for the underlying asset, specified by the StockSpec obtained from stockspec .

stockspec handles several types of underlying assets. For example, for physical commodities, the price is StockSpec.Asset , the volatility is StockSpec.Sigma , and the convenience yield is StockSpec.DividendAmounts .

Data Types: struct

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Settle — Settlement or trade date
serial date number | date character vector | datetime object

Settlement or trade date for the double touch option, specified as an NINST -by- 1 matrix using serial date numbers, date character vectors, or datetime objects.

Data Types: double | char | datetime

Maturity — Maturity date
serial date number | date character vector

Maturity date for the double touch option, specified as an NINST -by- 1 vector of serial date numbers or date character vectors.

Data Types: double | char | cell

BarrierSpec — Double barrier option type
cell array of character vectors with values of ‘DOT’ or ‘DNT’ | string array with values of “DOT” or “DNT”

Double barrier option type, specified as an NINST -by- 1 cell array of character vectors or string array with the following values:

‘DOT’ — Double one-touch. The double one-touch option defines two Barrier levels. A double one-touch option provides a Payoff if the underlying asset ever touches either the upper or lower Barrier levels.

‘DNT’ — Double no-touch. The double no-touch option defines two Barrier levels. A double no-touch option provides a Payoff if the underlying asset ever never touches either the upper or lower Barrier levels.

Data Types: char | cell | string

Barrier — Double barrier value
numeric

Double barrier value, specified as an NINST -by- 2 matrix of numeric values, where the first column is Upper Barrier(1)(UB) and the second column is Lower Barrier(2)(LB). Barrier(1) must be greater than Barrier(2).

Data Types: double

Payoff — Payoff value
numeric

Payoff value, specified as an NINST -by- 1 matrix of numeric values, where each element is a 1 -by- 2 vector in which the first column is Barrier(1)(UB) and the second column is Barrier(2)(LB). Barrier(1) must be greater than Barrier(2).

The payoff value is calculated for the point in time that the Barrier value is reached. The payoff is either cash or nothing. If you specify a double no-touch option using BarrierSpec , the payoff is at the Maturity of the option.

Data Types: double

Output Arguments

Price — Expected prices for double one-touch options
matrix

Expected prices for double one-touch options at time 0, returned as an NINST -by- 1 matrix.

More About

Double One-Touch and Double No-Touch Options

Double one-touch options and double no-touch options work the same way as one-touch options, except that there are two barriers.

A double one-touch or double no-touch option provides a payoff if the underlying spot either ever or never touches either the upper or lower Barrier levels. If neither barrier level is breached prior to expiration, the option expires worthless and the trader loses all the premium paid to the broker for setting up the trade. For example, if the current USD/EUR rate is 1.15, and the trader believes that this rate will change significantly over the next 15 days, the trader can use a double one-touch option with barriers at 1.10 and 1.20. The trader can profit if the rate moves beyond either of the two barriers.

References

[1] Haug, E. The Complete Guide to Option Pricing Formulas. McGraw-Hill Education, 2007.

[2] Wystup, U. FX Options and Structured Products. Wiley Finance, 2007.

Double No-Touch Binary Options

You will learn about the following concepts

  • Introduction to double no-touch binary options
  • How do they work
  • How no-touch options differ from call/put options
  • Examples

Introduction

Having explained how most of the other types of binary options work, we will now turn our attention toward double no-touch options. They are the exact opposite of double one-touch options. You again have two trigger levels, one above and one below the spot price, but here the price should not reach them, otherwise the option will be “out of the money”.

How do double no-touch binaries work?

When a person trades double no-touch binary options, he/she must select two price barriers, as well as a time period during which the trade will be active. Some brokers offer options with predefined trigger levels and expiry period.

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In order for the option to expire “in the money”, the underlying price of the asset must not touch either one of the price barriers. If it does, the trade will close out of the money.

Why double no-touch options?

Double no-touch binary options are commonly purchased when traders are convinced that the market is about to consolidate in a trading range, which often comes after hitting a new swing high or low. These options are usually traded by more experienced traders, but in certain situations even beginners can take advantage of the trading opportunities they offer.

Example

Let us assume that gold spiked to a new high of $1 280.00 and consolidated at around $1 275.00 following a correction. The trader expects that the precious metal will probably hold around these levels at least for the next one hour, because, for example, there are no other major economic indicators due to be released today.

The trader decides that this is the right time to purchase a double no-touch option with an expiration time of one hour, and an upper and lower barriers at $1 281.00 and $1 269.00 per ounce, respectively. If the yellow metal fails to rise or fall to these set barriers within the next hour, and instead reaches for example a high of $1 278 and a low at $1 272, then the option will become “in the money”. Logically, touching any of the two trigger levels will render it “out of the money”.

5 types of binary options

We will discuss the main types of binary options – the classic put and call, one touch, Double one touch and others. What is the difference between the main types of binary options.

In the 79th issue of ForTrader.org, we will continue to discover work with binary options. Recall that the last time we talked about the concept of this trading tool, about forecasting, strategies and types. This time we will expand the knowledge base and go a little deeper into the possibilities that binary options offer us.

Despite the apparent uniformity of trading, the very structure of binary options, similar to a betting transaction, can significantly diversify approaches and strategies. Well, indeed, if we can “bet” that a currency pair will reach a mark in 60 seconds, then why not argue that it will not? In this regard, binary options trading in practice has five main types. We will consider them.

View 1. Binary option “Cash or nothing” / “All or nothing”

This view of Binary Options most popular among traders. At the time of purchase, he has a certain percentage of profit and price. This amount is the volume of the transaction, and it is to her that the trader risks it. Prior to the purchase of “Сash or nothing” binar, it is required to make a prediction in advance whether the selected asset will rise or fall, a Put / Put or Call / Call option is purchased (see the previous article), respectively.

If in the end, at the time of execution, the trader is right, then he receives a predetermined amount of profit, usually 70-85 %% plus the initial cost of the contract. If the forecast did not materialize, then he loses the invested amount in full. Sometimes companies make a refund when they lose in the amount of 10-15%, but this cannot be considered the rule, rather, it is just a bonus to cheer up.

View 2. Binary option “Asset or nothing” / “Asset or nothing”

Binary Option Asset or Nothing practically no different from the above, “All or nothing.” It can also be bought and sold by setting a certain level, above or below which there will be a price at the time of execution, also receive declared profits or lose the value of the contract. The difference is only in determining the profit, which is expressed in the value of the selected asset.

In fact, because profit calculation is automatic, many traders do not even see the difference between the binary options Cash or nothing and Asset or nothing.

View 3. Binary options “One touch” / “One touch”

We mentioned this type of binary options in the previous article, but it will not be harmful to repeat. One touch in execution and trading strategies differs significantly from the previous ones. Having all the same value and profitability, the contract also implies the presence of a certain level of asset price. Knowing him, the trader must predict whether the price reaches this mark in the allotted time period. At the same time, it doesn’t matter at what price the contract closes, the main thing is that asset touched fixed level.

View 4. Binary options “No touch” / “Inviolable”

The opposite in name and meaning for the “One touch” binary option is “No touch”. The only difference is the trader’s forecast of whether the price reaches the level specified in the contract. If he believes that he will not achieve, then you should buy the “No touch” option. If at the time of closing the asset did not touch the levelthen the trader gets the agreed profit. Otherwise, he loses the value of the contract.

View 5. Binary options “Double one touch” and “Double no touch” / “Double one touch” and “Double touch”

These are the most complex, and therefore the least popular types of binary options. In fact, this is a modification of the “One touch” and “No touch” options – the strategy and execution are identical. However, in order to achieve profit, two fixed levels are set, to reach or not to touch which the asset must until the expiration of the exercise time of the option.

Based on your own preferences, offers from binary options brokers., as well as market conditions, it is more profitable to trade different types of binary options. However, most traders prefer “Cash or nothing” as the most affordable and easy to understand.

Other binary options articles
FORTRADER magazine experts

FORTRADER Magazine is a large team of experts in trading in financial markets. Traders, managers, investors, programmers, testers, technical administrators – we all work for you every day for many years. Sometimes we write articles together, then the whole journal becomes the author.

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