The AMEX FRO (Fixed Return Options) Thread

Quote from opt789:

I have been told that the CBOE will use the standard settlement for the new binary options on the SPX, and that the AMEX was told to use the VWAP settlement to avoid possible manipulation. Personally I would like them to add something a little more interesting like touch/no-touch, but this is a good start.
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Yeah, I'd prefer the American vs. European binary. They're following the CBOT here. The logic is that users want atm options. ATM touch exotics aren't terribly feasible. ;)
 
Quote from rickf:

I saw Steve Smith (TSCM) write about Fixed Return Options this morning. Tonight I checked out the AMEX website to learn more about them since I got a note saying that my options broker is offering them now.

Info on FROs:
http://www.amex.com/?href=/options/prodInf/OptPiFROs.MoreInfo.jsp

Given their binary all-or-nothing structure and coupled with a maximum $100 gain/loss per contract, I can't decide if these are "options for beginners" or "options for simple folks" or something that will take off as a serious investment/trading vehicle. At least for me, I like the fact that FROs do away with all the greeks, which is why I moved to futures late last year because it was much less stuff to worry about -- with FROs you decide the strike price you want your underlying to close above/below, place your order, and wait to see what happens. (Hopefully you did your homework correctly and are profitable, obviously!)

While your profits and losses seem to be capped at $100, which I guess can help folks manage their risks better - though I can't help wonder if FROs will be used mostly by retail investors as pure speculation and a form of options-oriented gambling for $100 risk per throw.

Thoughts? Reactions? Concerns?
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What is the commission rate on these, can someone give an example. This is amusing to me as binary outcomes on events are usually considered gambling by our enlightened lawmakers. ie will the cubs win or lose, etc. I am all for them, now if they could legalize prostitution and recreational drugs, we'd be making some progress. Can anyone provide a link to the CBOE FRO's.
 
After looking at these, I see a debit spread FRO is equivalent to a short IC and a credit spread FRO is long IC. So they're just the opposite of vanillas in terms of selling/buying premium.

These don't seem like gambling any more than existing strategies.
 
The margin should be for buys - the whole premium and for sells 100 - the premium. (your maximum loss)

The FRO up option at a strike of 20 would be the same as being long 100 normal 20.00 calls and short 100 normal 20.01 calls.

These strikes don't exist but would be needed to create a $100 payout on expiration if the stock is 20.01 at expiration.
 
20.01 or above at expiration and using the adjusted price not the stocks closing price.

I would hope commissions would be no more than 1.00 per contract and even that may get expensive.
 
Are they american or european? They should be useful in delta hedging, as their value should be equal to prob of being in the money.

You may want to read some posts by atticus. I recall that an element of his arb plays is based on binaries (but american style?).
 
Here is a pdf somewhat dated that discusses the FRO or fixed return options. I have only read through this once. They are european in the sense that they pay off when the strike is hit. This is obviously a different animal than a vanilla option. The settlement price is based on the VWAP of the underlying for AMEX.


http://www.riskglossary.com/link/binary_option.htm

http://www.optionsxpress.com/welcome/tour/trade/fro.aspx?SessionID=0

http://adamsoptions.blogspot.com/2008/05/so-how-might-one-use-these-new-fros.html

http://www.amex.com/amextrader/?href=/amextrader/tdrInfo/data/axNotices/2008/valert2008-18.html
 

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What's the liquidity on these FROs. I can't get any volume/liquidity data from the AMEX website?

Has anyone traded these FROs?

If there's liquidity, this seems to be a promising product.
 
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