A Touch Option is a type of option in which, unlike with traditional options, the payout can take only two possible outcomes: either you are paid the return in a predefined, fixed amount upon the occurrence of the event prior to expiry date, or you lose the amount invested in the option. Simply stated, a Touch Option is generally held until expiry in an “all or nothing” payout structure and based on a simple “yes” or “no” proposition: Will an underlying asset be above a certain price at a certain time?
The maximum loss is known when you trade Touch Option, and depending on whether it is a buy or sell position, the premium or the notional/payout (whichever represents the maximum loss) is reserved from your account in full when the Touch Option is dealt, i.e. the product cannot be traded on margin.
- If you buy a touch or no-touch option, then the maximum amount you can lose is the premium paid up-front (you stand to receive the notional/payout amount if the option “touches”). You must be able to pay this premium upfront, which is deducted from your account at the point of trade, and the market value of the touch option position cannot be used as leverage to support any other existing or new open positions from a margin perspective.
- If you sell a no-touch or touch option, then you receive the premium up-front (which you keep in entirety but may need to pay the notional/payout amount if the option “touches”). The premium is credited to your account at the point of trade, but the full notional/payout amount is reserved from the account and cannot be used over the touch option’s lifetime to support any other existing or new open positions from a margin perspective.
You should not engage in Touch Options trading unless you fully understand the basic aspects of such trading as well as its associated risks.