The Securities and Exchange Commission recently approved the listing and trading of Fixed Return Options (FROs) by the American Stock Exchange LLC (Amex).

There will be two classes of FROs: Finish High pays $100 if the underlying’s volume weighted average price on the last day prior to expiration exceeds a stated price. Finish Low pays $100 if the underlying’s volume weighted average price on the last day prior to expiration is less than a stated price.

The initial listing criteria for FROs require that an individual stock or exchange traded fund (ETF) underlying an FRO: (i) an equity, but not an ETF, must have a market capitalization of at least $40 billion; (ii) has minimum trading volume, in all markets in which the security trades, of at least one billion shares in the preceding 12 months; (iii) has a minimum average daily trading volume of four million shares; (iv) has a minimum average daily trading value of at least $200 million during the previous six months; and (v) has a minimum market price per share of at least $10, as measured by the closing price over the previous five consecutive business days preceding the date on which Amex submits a certificate to the Options Clearing Corporation for listing and trading.

To reduce concerns regarding potential price manipulation at expiration due to the “all-or-nothing” return provided by an FRO, Amex will settle FROs using an all-day volume weighted average price (VWAP) based on trading in the underlying security on the last trading day prior to expiration. Amex intends to publish and disseminate the current value of the VWAP calculation for FROs at least every 15 seconds throughout the last trading day prior to expiration.

The position limits for FROs will be 25,000 contracts on the same side of the market, and positions in FROs will not be aggregated with positions in other options on the same underlying stock or ETF for purposes of determining compliance with the position limits. FRO positions become reportable when an account establishes an aggregate position on the same side of the market of 200 contracts. A member, other than an Amex market maker, that maintains an FRO position in excess of 10,000 contracts on the same side of the market will have additional reporting requirements, including whether the position is hedged, a description of the hedge, and a description of the collateral. Amex is not proposing exercise limits for FROs.

Amex will use the same expiration cycle for FROs as it uses for traditional options, as well as the same strike price intervals. Symbols will be created for FROs that represent the underlying security, the fact that the option is an FRO rather than a traditional put or call, the expiration date, strike price, and the exchange(s) trading the FRO.

http://a257.g.akamaitech.net/7/257/2422/01jan20071800/edocket.access.gpo.gov/2007/pdf/E7-16330.pdf