The AMEX FRO (Fixed Return Options) Thread

thegazelle · May 11, 2008

Quote from atticus:

Let's talk in terms of the natural condor. It's confusing to some as a short IC is short gamma as is the long natural condor. They're not arbitrage equivalent to the vanilla condor. An XYZ FRO 100/100 spread is not equivalent to the vanilla 100 body or 100/105/110 condor. It's most similar to the vanilla vertical, but the payoffs will not be equivalent.

The Euro-convention barrier range exotic is the practical equivalent to a vanilla condor, but again, the payoffs differ. A 70/100 "short" barrier range will payout 100 at a pip under either barrier [at expiration], while the condor would likely show a loss. The vanilla position is analog in payout.

Has anyone traded these? I could use some help with symbology. I'd like to quote some this week.

Please do, spreads on what one would assume would be liquid (QQQQ, DIA) are not exactly tight..

IV_Trader · May 11, 2008

I wonder if there is a merit to use both FRO and vanilla for a dispersion trade.
Long basketâs calls and buy FL atm FROâs (on index)

atticus · May 11, 2008

Quote from IV_Trader:

I wonder if there is a merit to use both FRO and vanilla for a dispersion trade.
Long basketâs calls and buy FL atm FROâs (on index)

I'd imagine the edge loss and lacking volume wouldn't support a profitable dispersion trade.

stock777 · May 12, 2008

Amused that some think that 'binary' means 'gambling', as if everything else wasn't.

Nothing binary about a horse race either. (Unless you think win or lose means binary). Guess that's not gambling.

magicz · May 12, 2008

IMO I prefer better odds then binary.

commiebat · May 12, 2008

Quote from magicz:

IMO I prefer better odds then binary.

What does that even mean? Whether it's binary or not has nothing to do with your odds.

atticus · May 12, 2008

Quote from stock777:

Amused that some think that 'binary' means 'gambling', as if everything else wasn't.

Nothing binary about a horse race either. (Unless you think win or lose means binary). Guess that's not gambling.

Actually, it's identical to payouts on horseracing or any limited-risk odds-based binary outcome and flow impacts odds in racing and volatility in option-markets. Wagers impact odds just as in any volatility market, or any market for that matter. The zero-sum parimutuel pool is a good analogy to the payout in binary options.

atticus · May 12, 2008

Quote from commiebat:

What does that even mean? Whether it's binary or not has nothing to do with your odds.

My head hurts.

IV_Trader · May 12, 2008

Quote from atticus:

Actually, it's identical to payouts on horseracing or any limited-risk odds-based binary outcome and flow impacts odds in racing and volatility in option-markets. Wagers impact odds just as in any volatility market, or any market for that matter. The zero-sum parimutuel pool is a good analogy to the payout in binary options.

no

atticus · May 12, 2008

It's a zero sum analogy taking into account fixed odds. I realize that there are typically only two counterparties to an exotic option transaction [parimutuel comment]. It's an analogy to something underwritten/offered to >1 investor or the payoff on the OI of an individual listed contract. The payout-analogy sticks on any fixed-odds exotic. The parimutuel analogy is a bit stretched.