Stocks & Commodities V. 26:7 (67): Explore Your Options by Tom Gentile

Stocks & Commodities V. 26:7 (67): Explore Your Options by Tom Gentile
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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.

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