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.
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.
So how does a single FRO differ from an otm vertical that you don't want to touch? Is the margin more favorable?
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
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.