I looked at the new FRO's now trading at Tradeking. What do you think about them? As for me, I think the convenience does not justify the lower return.
Let me compare the returns if you were to do a credit spread vs. the FRO. Using the June 08 expiration (37 days) and 10 contracts ($1,000). The strike price is 145 with a "Finish Lower". Quotes were obtained May 15, 2008 11:15AM
1. Bear Call Credit Spread 145/146: Bid Price 0.34 x 10 contracts = $340 profit
Commissions: $(4.95 +0.65 x 10) x 2 legs =$22.90
Total Profit (%) = (340-22.90)/1000 options hold = 317.1/1000 = 31.7%
2. FRO 145 FL: Ask Price 0.81 x 10 contracts = $810 cost
Commissions: $(4.95 + 0.65 x 10) = $11.45
Cost basis = 810 + 11.45 = 821.45
Profit (%) =(1000-821.45)/821.45 = 178.55/821.45 = 21.7%
3. Conclusion
The pricing on the FRO is too expensive. The bid/ask spread is also too wide. If you got in and changed your mind, and were to close out your position, you would incur greater losses on the FRO. Not shown in my analysis were the "Finish Higher". But the results are similar. My overall conclusion is to continue using bull put credit spreads instead of 'finish higher' FROs. And to continue using bear call credit spreads instead of 'finish lower' FRO's
