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An Introduction to Fixed Return Option Trading
Fixed Return Options became available to Option traders in the US on 71 securities in May 2008. This unique new form of options trading has one of two results $0 final value or $100. This is an introduction into how FROs work as well as which brokers to use for Fixed Return Options.
What is a Fixed Return Option (FRO) ?
Trading Fixed Return Options: The Basics
Fixed Return Option Trading is very similar to traditional option trading except for a few critical differences:
- $100 Contract maximum and Minimum - At Expiration, the FRO contract will either reach a value of $100 or the contract will be worthless. There is no middle ground . This has led to Fixed Return Options being called 'All-or-Nothing" or "Digital" options.
- There are two types of FROs - Finish High and Finish Low: A 'Finish High' FRO works similar to a traditional Call option where you are bullish on the stock or financial instrument and expect the price to rise before expiration. A 'Finish Low' Fixed Price Option resembles a standard put option where the investor is bearish about the stock being optioned and expects it to finish below the strike price.
- The Final Strike Price is calculated differently - In order to prevent market manipulation the final strike price of a FRO is a weighted average of all the shares of the stock traded on expiration day instead of the final closing price. This is in place to prevent institutional investors from manipulating prices in their favor at the end of the day.
- 'In The Money' Fixed Price Options - If a FRO has a strike price of $50, 'Finish High' FROs will finish in the money if the strike price is $50.01 or higher. 'Finish Low' FROs will finish in the money if the final strike price is $49.99 or below. If the final strike price is exactly $50, everyone finishes out of the money.
Advanced Fixed Return Option Strategies
Trade New Options like a Champ
Although FROs are new to the American Markets as of May 2008, similar options have been traded in European markets before now. Additionally, using combinations of FROs can result in similar results as using traditional 'Butterfly' or 'Condor' option strategies.
Here is a leading publication on option trading. I highly suggest reading some if you are new to options trading.
Here is a leading publication on option trading. I highly suggest reading some if you are new to options trading.
Option Volatility & Pricing: Advanced Trading Strategies and Techniques
Amazon Price: $33.61 (as of 12/19/2009)
Which Stocks can FROs be Traded On?
A List of Fixed Return Option Equities
Initially the following 20 equities will be available to trade Fixed Return Options on, with the list eventually expanding to 71 securities (For the most current list see www.amex.com).
Stocks and ETFs initially available for trading in Fixed Return Options trading:
AAPL, C, CSCO, DIA, EEM, GE, GOOG, GS, HD, IBM, INTC, IWM, JPM, MSFT, OIH, QQQQ, SPY, WB, XLE, and XLF
Stocks and ETFs initially available for trading in Fixed Return Options trading:
AAPL, C, CSCO, DIA, EEM, GE, GOOG, GS, HD, IBM, INTC, IWM, JPM, MSFT, OIH, QQQQ, SPY, WB, XLE, and XLF
Brokerages that Offer Fixed Return Options
It appears that the popular online brokerage firm TradeKing is the first to offer comprehensive trading in FROs.TradeKing has a FRO trading interface up and running and priced at it's traditional options pricing of 4.95 a trade and $0.65 an option.
Here is a Comprehensive review of Tradeking:
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TradeKing Review
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This is a complete TradeKing Review including features, accounts, and company history. TradeKing Broke Onto the Discount Broker scene in Late 2005 with something rave reviews and something that had never been seen before by a reliable company - Sub...
Use Tradeking for FRO Trading
Have you used Fixed Return Options?
Have you used Fixed Return Options in your investing strategy? Have any essential tips to add about FRO trading? Let us know!
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- BH BH Jun 16, 2008 @ 2:53 pm
- HOW FRO PREMIUMS COMPARE WITH CALL AND PUT PREMIUMS
Unlike calls and puts, FROs will always trade for less than $1, or less than $100 per contract. FROs use a per-contract premium multiplier of 100. Because they settle in cash instead of in stock, a multiplier is used to determine the premium instead of the number of shares the contract represents.
This means if an FRO is trading for $0.45, your cost will be $45 ($0.45 x 100) per contract. However, unlike calls and puts, this multiplier is not based on the number of shares, because FROs are cash-settled and no stock will change hands at expiration. FROs tend to be less expensive than calls and puts with the same Strike Price, because the potential per-contract return for FROs is always exactly $100, irrespective of how far in-the-money they are at expiration.
For More on Fixed Return Options click here:
Fixed Return Options
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- BFuniv.com BFuniv.com Jun 4, 2008 @ 1:40 pm
- Sounds like playing roulette, with the strike price being the 0 and Double 00. Since most options expire worthless, it is usually the trades in and out prior to expiration where money is made. Thanks for the information, I'll take a deeper look.
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