As the opening bell was rung by Don Montanaro on May 8th, the creator of Fixed Return Options (FROs), he was hoping to see a new era of trading by bringing in a more simple way of option trading. FROs, simply put, pays out in either an all or nothing structure that alleviates the pains of trade calculations and confusing contract language that has high potential to deter the basic style of traders.
The straight forward approach to FROs is that you will be paid a fixed return of $100 per contract if your contract expires “in the money.” Now let’s explore the definition of “in the money” before you starting singing the 1930’s song named such (think Looney Tunes via Daffy Duck)
There are two types of FROs, called “Finish High” and “Finish Low” and both types have the similarly opposite meanings for being “in” or “out” of the money. Oddly enough, the simplicity will probably still be misunderstood by a small portion of the population who do not like to read the fine print. Even simplicity has its trade offs…
Finish High FROs:
You are in-the-money at expiration if the settlement value is at least one cent greater than the Strike Price.
You are out-of-the-money at expiration if the settlement value is equal to or less than the Strike Price.
Finish Low FROs:
You are in-the-money at expiration if the settlement value is at least one cent lower than the Strike Price.
You are out-of-the-money at expiration if the settlement value is equal to or higher than the Strike Price.
At first glance, I found FROs to be a little like sports betting. You can pick it to either win or lose. I typically try and avoid looking at the stock market as a sports betting complex for day traders, BUT I do see value in having an option like this. You are basically choosing whether the proposition is something that will or will not occur.
Let’s face it, your Return On Investment (ROI) isn’t going to be huge. Becoming a millionaire by doing a transaction $100 at a time might take awhile, but it is a fixed profit that has a descent ROI percentage compared to your initial investment. So you potential loss has a very low cap on it, most likely your payment for the contract and whatever brokerage fees you paid. Not exactly a “break the bank” type scenario…
One of the benefits of this style options are that it is low cost, which means many beginners won’t shy away from it, and it could open up another market of shareholders that like the simplicity of this option. Another great option is that the price is tied directly to the stock price and is exchange listed. So many people who already have existing brokerage accounts can begin trying these options out without the hassle of opening a new account.
Many consider this a “new and trendy” style that might phase out over time and it is sometimes regarded as a marketing ploy to strengthen the group of low cost investors, but whether the trend sticks or not, I think it’s a new simple way to invest and I always highly suggest investing your money. Also with any investment, do your homework and don’t look for get rich quick schemes, it should all pan out successfully.
The Finance Pig, LLC 