Fixed Rate Options have arrived.
Just to review, from the AMEX.
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.
I assumed the settlement price equaled the closing price on expiration. A commenter says they use a VWAP (Volume Weighted Average Price). That sounds correct, judging by this from the AMEX.
FROs will settle based on the Amex FRO Settlement Index(SM) for all trades in the underlying security executed during the last trading days regular trading session. The full day Amex FRO Settlement Index(SM) will be calculated continuously throughout the last trading day prior to expiration (normally a Friday). The running Amex FRO Settlement Index(SM) will be disseminated at least every 15 seconds using the unique wrap symbol used to distinguish the FROs from regular options on the same underlying security.
First reactions? They are incredibly annoying. My system has them right on the regular option screens. At every single strike. Take AAPL, which lists them under the symbol AXO. At every single strike.
And where is this Amex FRO Settlement Index they tell me about? I hit up AXO and get a big fat nothing.
As I noted the other day, the option quotes appear to center around the delta of the option. I emphasize the word "appear". The currently quote about 25 cents wide. Keep in mind they forever will trade between 0 and $1.00, so 25 cents is huge and untradable.
And remember also the "settlement price" differs from the actual price. So the actual delta remains unclear until I see that price. AAPL remains close to today's VWAP, so no real diff. in the two. But that obviously changes over time.
I stand by my initial expectation for these. IF they get popular (a very big if), they could really cause some volatility around ATM's near expiration. Now the definition of ATM differs if they use VWAP's, but the effect remains the same. If there is large open interest at some FRO strike that sits near the money on expiration, you have a war going on as both sides close at either 1 or 0.
The twist is that strike might not be near the price of AAPL. Let's say AAPL has a run late in the cycle Maybe AAPL trades at $210, but the VWAP sits near $190. The FRO 190 Finish High owners have incentive to gun the stock just enough to keep the 190's in the money.
10 comments:
A very big if indeed.. Who does the AMEX see this product catering to? This seems like they're trying to get a new product rolling that no one else has - but this is a weak attempt.
Why doesn't the AMEX list some of the big political binaries Intrade does? Equities seem pretty covered now with their options and SFFs.
Mike
There is a woman who was born during the Taft adminstration discussing the uptick rule again.
Yeah she made some really good points... kind of swinging me over to her side.
mike S: I have no clue who needs these. And all kidding aside, they really should list stuff like the political contracts and some sports contracts. I mean what need do these FRO's fill?
James: Caught the end of Muriel. I'm sure it was the very insightful "Rule Was Changed: Market Went Lower, ergo Rule Change Caused Market to Go Lower" argument. I'm with Mike though, she convinced me too, lol.
This system has problems that dwarf the uptick rule.
no question
Said this about binary options on my blog two days ago:
"One thing that doesn’t make a ton of sense to me at this point is the economic value of these options. I mean a put has a definite economic value as a hedge, just as insurance on property provides the economic value of risk distribution. But what economic value is there in a “Finish Low” binary option that can’t be accomplished via a put spread?
"At least at this point, it seems like not much more than another speculation vehicle. We’ll see."
That's a problem to me, because it validates every fear monger's statements about options and derivatives--that trading options is nothing more than gambling. From my perspective, maybe that's right. I am a speculator. But my speculation provides the grease that allows the hedger to come in and distribute his risk to others like me. I don't see how binary options add any value to what's already out there.
yes, saw your post and totally agree. I have no clue what these provide beyond some dice rolling.
a--just sent u some rsch on binary's interesting spread ideas..im not a proponent or opponent for that matter (if i had strong opinions, id start a blog :)), but i think there are MANY more ways to use these than a typical "punt"
d
hey dave: not saying they can't be used, just not sure there's a real need or desire for these. Thanks for passing over that stuff, I'll take a look.
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