Explore Your Options by Tom Gentile
How do fixed return options work?
Fixed return options (FROs) are new
contracts that recently started trading on
the American Stock Exchange (AMEX).
FROs are binary contracts that provide a
payoff based on whether the equity or
exchange traded fund (ETF) closes above
or below the strike price of the option. It is
similar to a flip of a coin — heads you win,
tails you lose. If you are correct, one contract
pays $100. If not, the loss is equal to
the premium paid for the contract.
As of this writing, FROs are listed on 20
stocks and ETFs. Each has a unique ticker
symbol; for example, the fixed return
options on Google (GOOG) trade under
TBA, and for the S&P Depositary Receipts
(SPY), the FRO symbol is SQY. The
value of the FRO is based on an index
computed using an average of prices and
the settlement value is based on average
prices on expiration Friday. The value at
expiration might be different from the
stock’s actual closing price. These contracts
settle European style and, consequently, can
only be exercised at expiration.