A one-touch put binary option is an American-style barrier option that settles immediately at 100 if the underlying asset trades at or below the strike price. Unlike European options, which can only be exercised at expiration, American options like the one-touch put binary option can be exercised at any time until expiration.
One Touch Put Binary Option in a nutshell
- American-style barrier option, settling immediately if underlying asset trades at or below strike price.
- Pricing of one-touch put binary option typically double that of European binary put option.
- Price difference opens arbitrage opportunities for traders exploiting pricing disparities.
Understanding One Touch Put Binary Options
In contrast to European binary put options, where the underlying asset settles precisely at the strike price at expiration, one-touch put binary options require the underlying asset to trade at or below the strike price for immediate settlement. This characteristic creates a clear distinction in strike price dynamics between the two types of options.
Pricing Disparity
Due to their immediate settlement feature, the price of a one-touch put binary option is typically double that of a European binary put option with the same strike price, implied volatility, and expiration time.
Arbitrage Potential
The pricing disparity between one-touch put binary options and European binary put options opens up opportunities for arbitrage trading strategies. Traders can capitalize on pricing differences by buying the binary put option twice and selling the one-touch put option once, and vice versa, if the pricing conditions are favorable.
Conclusion
One-touch put binary options provide traders with a valuable tool in the binary options market. Their flexibility, thanks to the American-style exercise feature, and their unique pricing dynamics make them stand out.
For further insights into binary options trading and related strategies, explore additional articles in our Binary Options Glossary.
