With the one-touch binary option trade, the binary options trader selects a strike price above or below the current market price as well as an expiration time. The broker will offer him a payout percentage corresponding to his selection.
For the investment to payoff, the price of the underlying asset only needs to hit the strike price once before the option expires and does not need to exceed this level at the time of expiry.
Payout will vary greatly depending how far away is the strike price and the time till expiration. The further away the strike price, the higher the payout. The longer the expiration time, the lower the payout as one has more time to hit the target.
Unlike the common high-low variant where the payout rarely exceed 90%, the payouts for one touch binary options can easily exceed 100% and payouts between 200% to 500% are not uncommon.
It is entirely up to the trader how much he wishes to invest with each purchase of the binary option but the minimum and maximum he can put in with each option varies across brokerages.
EUR/USD is currently trading at $1.29. A binary options brokerage is offering 200% payout for the one-touch binary option with a strike price of $1.30 that expires in 5 minutes.
After tracking the price movement of EUR/USD for the past hour, the binary option trader believes that the price will hit $1.30 within the next 5 minutes and decides to invest $100 to purchase this one-touch binary option.
If EUR/USD goes up to $1.30 anytime within the next five minutes, the investment pays off and the trader earns a profit of 200% of his initial investment, which is $200.
However, if the price of EUR/USD never rise to the $1.30 price point during the whole 5 minutes, the trader will have lost his initial investment of $100.
Note that it does not matter whether the price of EUR/USD skyrocketed up to $1.40 or flash crashed below $1.00, both the profit and loss will be fixed at $200 and $100 respectively.
Conversely, there is the no-touch variant as well. See No-Touch Binary Options.
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