Double No Touch Option
Definition: A Double No Touch Option is an exotic options contract that pays a predetermined amount only if the price of the underlying asset remains within a specified range between two barrier levels for the entire lifespan of the option. If the price touches or breaches either barrier at any point before expiration, the option becomes worthless.
How Double No Touch Option Works
Double No Touch Options are designed for low volatility environments where prices are expected to remain stable within a defined range. These options feature an all-or-nothing payoff structure and are generally lower in cost than standard options, making them attractive in specific market conditions.
- Upper and lower barrier levels are set in advance.
- If the underlying asset stays within these boundaries for the entire duration, the holder receives a fixed payout.
- If the price touches or exceeds either barrier at any time, there is no payout.
Example of Double No Touch Option
A company purchases a Double No Touch Option on USD/JPY with:
- Upper barrier: 152.00
- Lower barrier: 145.00
If the exchange rate stays within that range for one month, the company receives the agreed payout. However, if the price touches either barrier at any time, there will be no payout. Even a brief breach voids the payout potential, regardless of whether the market price quickly returns to the original range.
Key Components of Double No Touch Option
- Underlying Asset: The financial instrument (currency pair, stock, bond, commodity) on which the option contract is based.
- Barrier Levels: The predetermined upper and lower price points that define the acceptable range for the underlying asset.
- Expiration: The specific date and time when the option contract ends and final settlement occurs.
- Payoff Structure: The all-or-nothing return where the holder either receives the full predetermined payout or nothing at all.
When Double No Touch Option is Used
Double No Touch Options are instrumental for traders and companies seeking to profit from or hedge against low volatility environments. They are commonly used in:
- Structured products
- Treasury risk management
- Speculative strategies that capitalize on range-bound market conditions
These options are particularly valuable in currency markets where businesses need cost-effective hedging solutions for stable exchange rate periods, and for sophisticated investors who want to monetize their conviction about market stability within specific price ranges.
Related Terms
- Double One Touch Option
- Knock-In Option
- Knock-Out Option
- Barrier Option
- Exotic Option
- Binary Option
- Range-Bound Trading
References
- McDonald, R.L. (2013). Derivatives Markets (3rd ed.). Pearson.
- Hull, J.C. (2018). Options, Futures, and Other Derivatives (10th ed.). Pearson.
- Investopedia: Double No Touch Option