The AMEX FRO (Fixed Return Options) Thread

Discussion in 'Options' started by rickf, May 8, 2008.

  1. 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:

    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?
  2. who is your broker and when will they start offering them? I haven't looked into them at all....but its probably worth at least researching some
  3. wow... I was mildly interested in these contracts for a few minutes there.. they reminded me of what I used to trade on not to many years ago.... but, they totally lost my interest when I noticed that they're not using actual stock closing prices for settlement... they're using a weird index.. it makes no sense at all...

  4. Looks like they just volume weight the price
  5. MTE


    It's not a weird index, but a volume-weighted average price or VWAP. A lot of institutions use the VWAP algorithm to trade.
  6. magicz


    FRO seem like gambling! over-under getting paid or not. might as well go to vegas and bet on red or black. Maybe someone can enlighten me on how this actually work because what I read so far they are not that great.
  7. MTE


    These are binary options, like the ones on Fed Funds on CBOT or the ones CBOE is planning to add on its broad-based indexes (SPX is the first in line).
  8. rickf


  9. magicz


    still a bit of a gamble considering the risk graph.
  10. 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.
    #10     May 9, 2008