Hello everyone, I'm wondering, is it possible to create a spread using only vanilla options so that the profit\loss scenarios resemble those I would get by buying one-touch option? At any rate, is there somebody who knows of a broker that offer one-touch options (for currency-majors or commodities) for small traders? Thanks
Some barrier options can be priced as extremely tight, leveraged put/call spreads... For the ones that have path dependency aspects, things get trickier.
There is no such a thing that an american digital replicated (hedged) with a spread. Narrow spreads mean huge slippage and costs effect relatively to the spreads. They are other ways to do that. Masteratwork
I wasn't talking about hedging anything, so what does it have to do with transaction costs? Theoretical value (TV) for certain binaries is determined by pricing them as very tight spreads with some provision for an overhedge. Whether you then believe the TV you obtain is an entirely different matter.
OP, Remember that a american digital is exercized since it hits the trigger, it's another story with vanilla options. Hence, narrow spread would only help you to see the limit for european digitals. It's an interesting stuff though.
You can replicate a lookback with a strip of touch options, but you can't replicate a vanilla option or spread with touches. You would need to stick with Euro-convention binaries.