Interesting product due out soon that is apparently even big in France. Yes, Fixed Rate Options . I'll let the AMEX do the 'splainin (hat tip Aiden).
The American Stock Exchange trades Fixed Return Options (FRO's) on a number of securities. Fixed Return Options (FROs) are exchange traded binary or "cash or nothing" options based on an underlying security such as a stock or ETF. There are two type of FROs: Finish High FROs and Finish Low FROs. At expiration, an in-the-money FRO pays the holder of the option $100.00 per contract. For example, the holder of the XYZ June 20 Finish High FRO would receive $100.00 at expiration if the Amex FRO Settlement Index(SM) on the last trading day prior to expiration for XYZ was $20.01 or higher. If the Amex FRO Settlement Index(SM) closed at $20.00 or lower, the holder of the XYZ June 20 Finish High FRO would receive $0.00.
Well it sounds from that description they exist already somewhere, though I don't see any. There are similar binary "bets" available on places like HedgeStreet and Intrade.
Essentially it sounds like the price of the option will approximate the delta of that option. In other words if those regular XYZ 20 calls from above have a 60 delta, the FRO's should trade for 0.60.
If these catch on, it will definitely have an effect of volatility as arbs will set up. If that effect is higher volatility, expect the bleating to commence as soon as that becomes apparent. I would guess it would add small to volatility right around high open interest strikes and near expiration. Owners of these FRO's are going to have all or nothing bets that depend on which side of the strike it lands.
I would reemphasize also that ALL significant changes in the marketplace can tug volatility one way or another, and it's a long way between announcing some new product and seeing whether it even generates enough flow to hit the radar.
9 comments:
Fascinating! With some very interesting pinning implications.
Of course this will probably make that Wednesday afternoon peek that much more valuable...
most definitely.
I guess that look will be out tomorrow incidentally, lol
Adam,
CBOT offers binary options on Fed Funds rates. http://www.cbot.com/cbot/pub/cont_detail/0,3206,1415+39173,00.html
Apparently you can put on a position in standard options that is in essence binary, or you can use these.
Can't say I know anything more about it than that.
They had these in Europe on commodities for a while I believe, would be interesting if they become available on US equities
That will be great to refer to if/when these pups catch on and all sorts of conspiracy theories abound. Many thanks to both.
Settlement price is VWAP. You were aware of that, right? At any rate, difficult to exactly arb against vanillas. Otherwise, they are just standard digitals.
I was not aware it was VWAP, I assumed it was closing price. The description calls it "settlement index", so sound like you are correct.
Same effect on volatility though, there will just be a different price in play. With another issue being a big print near the end could *accidentally* tweak the VWAP.
You want games? Be grateful that they don't introduce some form of knock-out or knock-in options. There were some games with those in the mid-90s, because all the price has to do is touch a level and then the payoff is lost or gained.
I can imagine. Sounds like an invitation to manipulate.
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