No-Touch Binary Options Explained
With the no-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 must not reach or exceed the strike price anytime before the option expires.
Payout will vary greatly depending how far away is the strike price and the time till expiration. The further away the strike price, the lower the payout as there is less chance to touch the target. The longer the expiration time, the higher the payout as one has more time and hence more chance to touch the target.
Unlike the common high-low variant where the payout rarely exceed 90%, the payouts for no-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 no-touch option but the minimum and maximum he can put in with each option varies across brokerages.
No-Touch Binary Option Example
EUR/USD is currently trading at $1.29. A binary options brokerage is offering 50% payout for the no-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 not hit $1.30 within the next 5 minutes and decides to invest $100 to purchase this no-touch binary option.
If EUR/USD goes up to $1.30 anytime within the next five minutes, the trader will have lost his initial investment of $100.
However, if the price of EUR/USD never rise to the $1.30 price point during the whole 5 minutes, the investment pays off and the trader earns a profit of 50% of his initial investment, which is $50.
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 $50 and $100 respectively.
One-Touch Binary Option
Conversely, there is the one-touch variant as well. See One-Touch Binary Options.