INTRODUCING FIXED RETURN OPTIONS (ALSO KNOWN AS BINARY OPTIONS)

Welcome to the cutting edge of option trading

WHAT'S A FIXED RETURN OPTION?

Fixed Return Options, or "FROs" are also known as "binary options." That's because there are only two possible outcomes at expiration. Either you achieve your maximum potential profit, or you experience your maximum loss.

FROs offer a "fixed return" of $100 per contract. Buyers of FROs that expire in-the-money receive $100 per contract, and buyers of FROs that expire out-of-the-money receive nothing. There's no in-between.

So, FROs are an "all-or-nothing" trade.

THE 2 TYPES OF FROs:

"Finish High" and "Finish Low."

Finish High FROs are a bullish trade. They finish in-the-money if the settlement value of the underlying security is greater than the Strike Price at expiration. They are out-of-the-money if the settlement value of the underlying security is lesser than the Strike Price at expiration.

Here's the profit + loss diagram of a Finish High FRO at expiration compared to a long call.

Finish Low FROs are a bearish trade. They finish in-the-money if the settlement value of the underlying security is equal to or lower than the Strike Price at expiration. They are out-of-the-money if the settlement value of the underlying security is lesser than the Strike Price at expiration.

Here's the profit + loss diagram of a Finish Low FRO at expiration compared to a long put.

HOW FROS ARE SETTLED

FROs are European-style options with automatic cash settlement.

"European-style" means the option can't be exercised prior to expiration. Automatic cash settlement means if you bought an FRO that expires in-the-money, the Options Clearing Corporation will automatically exercise on your behalf and deposit $100 cash into your account. If you sold an FRO that expires in-the-money, you will be assigned by the OCC, and $100 cash will be automatically deducted from your account.

Whether or not FROs are in-the-money or out-of-the-money is determined a bit differently than standard options.

Settlement value for calls and puts is usually determined by the underlying stock's price when the market closes on the expiration date. But whether an FRO is in- or out-of-the-money is determined by calculating the underlying security's AMEX FRO Settlement Index value, or "AFSI."

The AFSI equals the Volume Weighted Average Price, or "VWAP," on the day the option expires. In case you're not familiar with the term VWAP, it's calculated by adding up the dollar value of all trades on a given stock on a given day, and dividing that sum by the total number of shares traded.

In other words, the AFSI equals the average dollar price of the underlying security on the FRO's expiration date.

You can read a more detailed explanation of AFSI, VWAP and FRO settlement by downloading a free FRO whitepaper by Senior Options Analyst, Brian Overby. Enter your email at the bottom of the page, and we'll send it to you right away.

HOW FROS ARE TRADED

FROs are listed on the American Stock Exchange (AMEX), and like calls and puts, they can be bought or sold at any time during the life of the option contract. In addition, like calls and puts, the price of the FRO will change over the life of the option contract based on movements in price in the underlying security.

FROs are available for 71 securities at this time. Here is a listing of the securities, the ticker symbols and the relevant FRO symbols. To trade the FRO, log in or open a TradeKing account now. Then, select FRO option chain for the security you're interested in. If you are already logged in to your TradeKing account, simply click the FRO symbol to go to the option chain.

YOU CAN TRADE FROs ON THE FOLLOWING SECURITIES

LEARN MORE ABOUT FIXED RETURN OPTIONS

So far, we've just scratched the surface of Fixed Return Options. To get the complete picture, feel free to download our free whitepaper that will teach you the ins and outs of this newly-listed financial instrument.

Just enter your email below, and we'll immediately send you a FREE whitepaper that's packed with information about Fixed Return Options by TradeKing Senior Options Analyst, Brian Overby.

You'll learn:

• The risks and rewards of Fixed Return Options
• The similarities and differences bewteen FROs and traditional calls and puts
• How FRO premiums compare with call and put premiums
• How FROs are settled at expiration
• And more

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