introducing…FROs!
Here’s some very exciting news: today marks the first day of trading of a new product called Fixed Return Options, or FROs for short. FROs were co-invented by a team of Amex executives including our very own Don Montanaro, aka BigDog, aka the Chairman and CEO of TradeKing. In fact, he’s ringing the Amex opening bell with the whole FRO team today.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 our FROs educational whitepaper, written by yours truly.
Also known as “binary” or “all-or-nothing” options, FROs boil the options concept down to its essence. They come in two flavors: Finish High, i.e. above the strike price, and Finish Low, or below the strike price. If you predict the outcome correctly, at expiration you earn a fixed return of $100. If you’re wrong, you get nothing and your loss is limited to the premium paid. 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 differences, so for the full scoop I’d encourage you to check out our new my educational whitepaper, which lays out the deal pretty succinctly, I think.
Needless to say, watch this space in the coming weeks for additional tips and strategies for using FROs effectively, whether you’re looking to speculate, protect your profits, hedge risk or earn income.
And let us know what you think! I know Don and the whole TK crew are excited about this launch, and we’re eager to help lead the charge towards simplifying options investing with this new product.
Regards,
Brian (OG)
[image: H23 BB00934850 * ...my $100 'star note' by TheAlieness GiselaGiardino²³ on flickr]
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.
While implied volatility represents the consensus of the marketplace as to the future level of stock price volatility or probability of reaching a specific price point there is no guarantee that this forecast will be correct.
Any strategies discussed or securities mentioned, are strictly for illustrative and educational purposes only and are not to be construed as an endorsement, recommendation, or solicitation to buy or sell securities.
Comments
Follow commentsScripture Distributors Mission posted May 08, 2008 (09:16AM)
Charles Bronson posted May 08, 2008 (09:51AM)
Hey Options Guy,
Couldn't somebody just straddle finish high and finish low extreme strike prices (high and low) and bank money either way? If you're playing in the short term, and barring sept 11 style attacks or credit disasters, how could a guy lose?
What's the catch? Am I missing something here? This seems almost like a sure thing. Please thank Don for me. I love this! I'm going to start playing with it tomorrow.
Cheers,
Bronson
UPod posted May 08, 2008 (12:06PM)
Also known as "binary" or "all-or-nothing" options, FROs boil the options concept down to its essence. They come in two flavors: Finish High, i.e. above the strike price, and Finish Low, or below the strike price. If you predict the outcome correctly, at expiration you earn a fixed return of $100. If you're wrong, you get nothing and your loss is limited to the premium paid. Both your max gain and losses are contained and easily calculated when you put on the position. What could be simpler?
I agree - that's sounds pretty darn simple. Black and white with no grey in-between.
UPod posted May 08, 2008 (12:30PM)
Brian - Great job on the White Paper by the way. A very easy and understandable read. It all makes complete sense to me. I find using VWAP to determine the settlement index value quite interesting ( along with exceeding the strike by a penny to be in the money ).
If I understand this correctly, I can actually write a FRO contract without actually owning the underlying security? I would collect a premium, then $100 cash in my account would be set aside ( or held ) till expiration in case the FRO is exercised due to the settlement value exceeding the strike by at least a penny.
Dendrite posted May 09, 2008 (04:15PM)
Interesting stuff... but I would echo Bronson's question above: If I bought XYZ FH FRO May 50 at 0.30, and XYZ FL FRO May 50 at 0.30 (contracts), then as I understand each would be:
0.30x100=$30+4.95+0.65per contract= $35.60, Total for the FH and FL positions :$71.20
At expiration (assuming a non $50.00 VWAP), one is worthless, the other is worth $100. So 100- 71.20= $28.80 gain.
It seems you'd be guaranteed to pull in the 28 bucks by taking no risk at all... As I'm new at all this, and it seems to good to be true, I probably am misunderstanding or missing some factors.
Any thoughts?
tradewisely posted May 11, 2008 (09:50AM)
Dendrite,
Great Idea , but not possible. You would never be able to buy both sides at one time for less than a hundred bucks. You can if you time the market, but that is quite risky.
Good luck!
optionsguy posted May 11, 2008 (12:09PM)
If you were to sell the Finish High (FH) and sell the Finish Low (FL), this is very similar to the Iron Condor strategy (four legged trade). You would hope the underlying would stay between the two FRO strikes prices. If you would like to see an Iron Condor Profit and Loss graph just pop over to "The Options Playbook" under the tools menu, it is play number 26. FYI...You have to be logged in to your TK account to view The Playbook online. With lowered commissions and tighter bid/ask spreads the Iron Condor has became a very popular strategy. Now with FROs you can do something similar with two less legs to pay commissions on and two less bid/ask spreads to deal with.
Regards,
Brian (Og)
optionsguy posted May 11, 2008 (01:24PM)
Thanks for accolades on the white paper and for being a leader in the community. You are dead on with your explanation on how selling a FRO option either FH or FL would work in the margin department. This is very similar to selling a one point credit spread in the "normal" option's world. Play fourteen (with calls) and Play sixteen (with Puts) in "The Options Playbook". But once again you are dealing with lower commission costs and have one less bid/ask spread to deal with.
Regards,
Brian (Og)
optionsguy posted May 11, 2008 (01:46PM)
I like the creativity that the FROs create. I think Bronson was speaking of a different type of trade then a long straddle, but none the less. Tradewisely is correct, in that, if you Bought a FH and a FL at the same strike in one trade it would trade for close to the dollar or $100 payout price. Let's chat about the pricing of FROs. Since they pay $100 if ITM at the end, the price of the FROs will be very close to the probably if that $100 payout happening. So ATM FROs will always trade close to 50 cents because there is a 50/50 chance of the option finishing ATM when the VWAP is currently at the strike. The probability calculator can shed some insight as to the price of the FROs if the VWAP is OTM, because of this fact. This is a blog post in itself, so I will eventually write one on the topic.
Regards,
Brian (Og)
Charles Bronson posted May 12, 2008 (07:11AM)
Thanks for your help, Brian.
Cheers.
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