So how might one use these new FRO’s (Fixed Rate Options)? The great Larry McMillan has some thoughts.

A basic play involves “writing” Finish Highs vs. a stock long. The plus side is that unlike, say, a regular covered write, you do not give away much upside. If the stock explodes you only lose 1.00 minus the premium you take in. The minus side is that you don’t take in much premium for your effort.

As McMillan notes, it is essentially equivalent to selling a $1 “regular” call spread against a long.

Now of course not every stock has $1 strikes. In fact, most don’t. McMillan uses an IBM example to make this point.

He also sheds some light on the use of VWAP as opposed to actual price to “settle”. Yes, it dissuades manipulation that would run wild around strikes. The volume needed to move even a penny provides a pretty large barrier. Won’t stop the bleating from the serial shriekers though.

VWAP use does not change the basics of the product, it just changes the underlying price in the valuation calculation.

Do we really need options like these? I suppose someone somewhere demanded them. As a general rule, something gets popular off-floor and the exchanges eventually run out a duplcate product. Most would rather trade something on an exchange, with it’s guarantees and clearing and all, whenever possible.

I will not be the first in the pool to play them by any stretch. I tend to always feel products like this, or the VIX trading products as another example, add a needless layer of complexity. If the net effect really just creates tighter strikes, I would sooner just add the tighter strikes.

…..And as an aside, if we had dollar strikes in everything, Cramer would spontaneously combest calling all the pins.