Everyone, this is a truly thrilling day for me. After years of hard work and keeping the faith, an exciting new investment product I helped invent has just begun trading publicly at the American Stock Exchange. I’m proud to introduce you to Fixed Return Options, FROs for short. If you’re a TradeKing client, you can begin trading any of 20 pilot FROs today at Trading > Options > Fixed Return (FROs). For the full educational scoop, check out this educational page on FROs.
The idea for FROs – also known as “binary” or “all-or-nothing” options – was born several years ago when several of my Amex buddies and I were discussing the needlessly complex language that surrounds options trading today. If you’ve blazed a trail in your circle of friends or colleagues trading options, you know this scenario well: in the midst of some friendly stock chat, you mention an options position you’re holding – maybe it’s a protective put to safeguard profits, or a covered call you wrote to earn some extra income, or maybe it’s a spread or something fancier. Huh?
It’s a classic E.F. Hutton moment: if your friends aren’t already using options in their portfolio, you might encounter some surprising resistance to wrap their minds around the myriad uses for what they perceive only as a high-risk, complicated investment product. You may find yourself starting to explain how options work and, as arcane terms like “long call” or “strike”, “time value” or “IV” roll off your tongue, your friends eyes glaze over. Then you remind them to multiply everything by 100, because options are contracts which typically are tied to 100 shares of an “underlying”. Phew! How can you explain to them that a long call translates simply into a belief that a stock will finish higher than the strike? Forget about painting the complete picture, of how options can be used, alone or in combination, to reflect all kinds of beliefs and market conditions.
If you’ve been in this position before, you know that options trading presents two big hurdles for investors new to them: first you’ve got to bushwhack your way to understand some fairly complex terminology. Only when you “get” the terms can you clear the second hurdle: realizing that options can be used for risky speculation, but also hedging risk, protecting profits or earning income. That second step is usually when the lightbulbs go off in a big way. When used judiciously, options trading can offer strategies for success in up, down, sideways AND volatile markets. So, a bunch of us in the industry have thought for some time – why don’t more people avail themselves of option trading strategies (perhaps due to the aforementioned hurdles), and what can be done to safely make option trading more approachable to more retail investors (maybe remove some of those hurdles)?
FROs were our response to this persistent problem. We banded together to develop a radically simplified option contract that came in two flavors: Finish High, i.e. above the strike price, and Finish Low, or below the strike price. If your prediction proves correct upon expiration, you earn a fixed return of $100. If you’re wrong, you get nothing. Both your max gain and losses are contained and easily calculated when you put on the position. What could be simpler? (There are a couple of other minor differences, so for the full scoop I’d encourage you again to check out our new educational page on FROs.)
We think FROs is options trading distilled to its essentials: very easy to understand and build upon (we hope making concepts like “Delta” so intuitive you can understand their import without ever even knowing the term “Delta” – dig that!), affordably priced, and generally a great “starter” product to help options-curious investors dive in and see the full range of benefits this product can offer.
Furthermore, when expert options traders compare the returns in certain ranges of FROs compared with their most closely related traditional option contracts, FROs can be seen to be a legitimate alternative offering a distinct payoff profile, and thus a true alternate strategy and amplitude. Neat stuff, eh?
We’ll be pumping out lots of educational content on these new products in the next couple of weeks and months, and of course we’d love to hear your feedback, too. FROs have been my “baby” for so long, along with my colleagues at the Amex, at the OCC, here at TradeKing and at other firms who contributed and cooperated in bringing this new product to fruition – so we are very eager to see how they fare and do everything we can to get the word out.
Here’s to a new era in options investing – and to making your dreams a reality!
[photo credit: Alan Rosenberg/American Stock Exchange]
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