The AMEX FRO (Fixed Return Options) Thread

surfingkid · May 13, 2008

The settlement index is designed to take an average price on the day your option expires. Since you are either 'in-the-money' or 'out-of-the-money' by 1 cent either way, they had to use an average:

http://www.tradeingroups.com/understanding-fixed-return-options-fros/

atticus · May 14, 2008

Quote from surfingkid:

The settlement index is designed to take an average price on the day your option expires. Since you are either 'in-the-money' or 'out-of-the-money' by 1 cent either way, they had to use an average:

http://www.tradeingroups.com/understanding-fixed-return-options-fros/

I suppose there is an argument for VWAP, but there has been FX and index exotics traded OTC for decades using spot as the mark.

surfingkid · May 14, 2008

If they did it based on closing price, seems it would be simple to manipulate it one penny in either direction. Question is has anyone tried it and how did it work out?

atticus · May 14, 2008

Quote from surfingkid:

If they did it based on closing price, seems it would be simple to manipulate it one penny in either direction. Question is has anyone tried it and how did it work out?

I have a lot of experience in FX Euro and American exotics. I've seen spot trade to a known barrier and then immediately retrace the move. IOW, spot was traded to trigger a massive payout.

kinggyppo · May 14, 2008

Quote from atticus:

I suppose there is an argument for VWAP, but there has been FX and index exotics traded OTC for decades using spot as the mark.

This VWAP thing is strange to me. To me it dilutes the usefulness
of the product. So you take the VWAP of the underlying on options expiration day for your price then?

atticus · May 14, 2008

Quote from kinggyppo:

This VWAP thing is strange to me. To me it dilutes the usefulness
of the product. So you take the VWAP of the underlying on options expiration day for your price then?

Yeah, my understanding is that it's the expiration DAY vwap.

surfingkid · May 15, 2008

This is my attempt to summarize:
http://www.tradeingroups.com/amex-fro-settlement-index-vwap/

stock777 · May 16, 2008

fwiw, they might even know how to game vwap.

if not for using VWAP, assuming any volume at all in these things, GUARANTEED it would be gamed big time.

atticus · May 16, 2008

Quote from stock777:

fwiw, they might even know how to game vwap.

if not for using VWAP, assuming any volume at all in these things, GUARANTEED it would be gamed big time.

The concern is manipulating the closing price on spot. VWAP behaves like a moving average. It's unlikely anyone would attempt to manipulate the VWAP to close O/U the strike due to the size needed to gun the average. Barriers are defended/gunned daily in OTC exotics as they're marked to spot. FWIW, I doubt these things will take-off.

CPTrader · May 16, 2008

Quote from atticus:

The concern is manipulating the closing price on spot. VWAP behaves like a moving average. It's unlikely anyone would attempt to manipulate the VWAP to close O/U the strike due to the size needed to gun the average. Barriers are defended/gunned daily in OTC exotics as they're marked to spot. FWIW, I doubt these things will take-off.

Atticus, why do you doubt it will take off - they seem well designed and seem to address the issues that would make traders wary of them. Additionally, their simplicity should lead to broad usage by pros and non-pros.

So why do you think the product will fail?? Just curious....