Fixed Return Options
Fixed return options (FROs) are a type of exchange-traded binary option typically offered by USA-based and licensed brokerages. This tutorial explains the ins and outs of fixed return options and highlights the critical differences between FROs and global-style binary options. We also explain how to start trading fixed return options and review the top brokers, accounts and trading apps.
Best Fixed Return Options Brokers
Fixed Return Options Explained
Fixed return options are a type of derivative used to speculate on the price movement of global financial assets, such as stocks, forex and commodities. Introduced into the US retail markets in 2008, FROs were approved by the SEC and are only traded on regulated exchanges and brokerages.
Simplicity is the main feature of fixed return options. Investors only need to decide whether an asset’s price will finish above or below a specific strike price at a future expiry time.
We are using Tesla stock as an example of an underlying asset on which a fixed return options contract is based. In this example, the current value of this equity is $300.
Trader A believes that Tesla will recover and return to its record highs within 60 days. Accordingly, they purchase a call contract with an expiry time of 30 days at a strike price of $400. This contract costs them $15 and will close for $100 minus commission if it is in-the-money at expiry.
Trader B is less optimistic about the future of Tesla stock but still has a positive performance sentiment for the short-to-medium term. They purchase a call contract with an expiry time of 30 days at a strike price of $325. This contract costs them $65 and will close for $100 minus commission if it is in-the-money at expiry.
After 30 days, the price of Tesla stock has risen to $340.
Trader A’s contract expires worthless and they lose their $15 investment. However, it’s worth noting that they could have sold their contract to another trader on any trading day between their purchase and expiry.
Trader B’s contract finishes in-the-money, and they are paid $100, making $35 on their initial $65 investment. After paying a commission to the brokerage or exchange, this money is theirs to withdraw or continue to trade with.
Fixed Return Options Vs Binary Options
Traditional binary options can be traded over-the-counter (OTC) and involve a contract between often unregulated brokers and their clients. In contrast, fixed return options are exchange-traded on platforms such as Nadex, CBOE, and NYSE American.
While with binary options, investors can set their stake and receive a payout based on a broker’s chosen parameters, fixed return options contracts always expire worth either $0 or $100, with traders’ potential profits the difference between $100 and the price they paid for the contract.
As an exchange-traded asset, fixed return options offer investors more flexibility to exit their position early than binary options.
Fixed Return Options Vs Other Products
Fixed return options also differ from other retail trading products such as CFDs and vanilla options. Investors cannot lose more money than staked on a contract. However, gains are also capped when trading with the majority of online brokers.
There are also no overnight fees or other costs associated with holding contracts for a long duration, meaning holding positions for as long as 60 days or even six months is viable.
As derivatives, fixed return options differ vs stocks or equities in that an underlying asset is never owned. Instead, traders are merely speculating on the price movement of an underlying instrument.
Fixed return options are a relatively obscure product compared to their non-US counterparts. As a result, there are far fewer assets supported by FRO brokerages than by other firms.
Supported assets include several stock index futures, major and popular forex pairs, USA-based single stocks, energies, metals and soft commodities. However, most CFD brokers and investment firms have a more comprehensive selection of these markets.
Advantages Of Trading Fixed Return Options
- A Flexible Investment – As FROs are exchange-traded, investors can sell their position at any time during market open.
- Capped Losses – With FROs, investors cannot lose more than the money they spend on a contract.
- Tax Advantages – In some regions, fixed return options profits are classed as gambling and are therefore not subject to tax.
- A Regulated Product – Unlike binary options, FROs are primarily traded on reputable and regulated exchanges and brokers.
- Straightforward – Fixed return options are easy to understand for beginners and traders new to the type of product.
Disadvantages Of Trading Fixed Return Options
- Limited Payouts – Compared to other products such as CFDs, traditional options and even leveraged stock purchases, FROs offer fairly limited payouts.
- Obscure Product – Not many brokerages support fixed return options, and only a small number of assets are supported on the exchanges that do.
- Regional Restrictions – FROs are almost exclusive to the USA. Global traders may be unable to create an account with American brokerages due to jurisdiction limitations.
- Entirely Derivative Based – None of the underlying asset is owned at any point in a fixed return options trade. This means no dividend payments if a stock price moves in your favor, for example.
- Trading Fees Apply – Unlike with fee-free binary options, brokers and exchanges may levy commissions on investors for purchasing, selling and settling contracts.
Safety & Regulation
In contrast to global binary options, trading fixed return options is regulated and relatively safe. This is due to the SEC oversight of the sector and CFTC regulation of FRO specialist brokers such as Nadex.
We have also found that using two-factor authentication (2FA) is one of the best security methods to safeguard trading accounts.
Fees & Commissions
The price traders pay for exchange-traded contracts instead of over-the-counter options is literally a higher price.
While binary options are primarily fee-free, brokerages that support FROs often make their money through commissions. These are charged for buying or selling a contract and can be paid out on a successful trade.
With a product such as fixed return options, it is easy to confuse the simplicity of the trading mechanism with an overall understanding of the markets. Therefore, before speculating on any asset, we recommend that traders equip themselves with both solid fundamental market knowledge and specific information and insights on the instrument in question.
In the modern trading sphere, education is available through many avenues. These include books, brokers’ own training guides, YouTube videos and trading academy courses and classes.
While fixed return options are not the most complex of trading products, it is still important to find a broker with a trading platform that offers solid charting tools capable of precise technical analysis. Whether investors opt for a universal platform such as MetaTrader 5 (MT5) or a proprietary solution running on TradingView charts is up to individual preference.
The best platforms will have handy features such as built-in trade calculators, economic calendars and support for automated trading programs like Expert Advisors (EAs). Those who value trading on-the-go should also ensure their chosen broker offers a fixed return options trading app.
The wide range of strike prices, expiry times and assets available to investors means that several trading strategies are viable for fixed return options. Our experts have selected five trading strategies suitable for beginners up to experts…
FROs are ideal for trading short-term momentum-based opportunities in volatile markets. This is due to the range of expiry times and capped losses of the product.
Short-term momentum is built off buy or sell pressure and is often triggered by breaking news and bucks value investing principles or long-term trends. Identifying a momentum-based move can yield value for fixed return options traders.
The option to pick lengthy expiries opens the door to long-term speculation on assets. This strategy is good when an asset is predicted to make sustainable value gains, with the length of trade rendering short-term momentum swings irrelevant.
Investors can opt for 30-day, 60-day or even longer options contracts of up to 6 months before expiry. However, returns on successful trades may be less than for shorter-term predictions, for example, on contracts that close after 60 minutes.
The exchange-traded nature of FROs means potential for scalping systems. This entails attempting to create wealth by buying contracts and exiting them early by selling them to other traders following an increase in value.
Scalpers should pay attention to the commissions for buying and selling contracts to ensure this strategy is profitable in the long term.
Hedging is another way to lock in profits or minimize losses on active fixed return options contracts. This strategy involves opening additional contracts, either with opposite price predictions or different expiry times on the same or similar assets.
As with scalping, be aware of the commissions and fees involved with buying additional contracts before committing to this strategy.
Automating your fixed return options trading may lead to some of the best outcomes. This is due to the precision, round-the-clock trading and unemotional nature of expert advisor (EA) programs.
However, this strategy can only work on trading platforms that facilitate third-party trading programs, such as MetaTrader 4 (MT4) or have proprietary automation solutions.
Comparing Fixed Return Options Brokers
When looking for the best fixed returns options brokerage and account, we recommend searching for companies that excel in the following areas:
- Reputable & regulated brand
- Market insights on volume and volatility
- Competitive commissions, fees and payouts
- Good trading platform and reliable investing technology
- Regionally relevant payment methods with no deposit or withdrawal fees
- Quality range of assets spanning forex, stocks, precious metals such as gold and energies
- Helpful customer support team that can answer questions on daily earnings and income, sign-up processes, withdrawal requirements, plus key terms/terminology
How To Make A Fixed Return Options Trade
Here is a how-to guide for making a fixed return options trade:
Find A Brokerage
Using the above criteria, select a broker that supports fixed return options trading. Create an account and verify your identity to unlock the full range of trading features.
Suppose your broker supports demo account trading using paper funds. In that case, our experts recommend using this feature to learn more about the intricacies of FROs.
Make A Deposit
The next step is to add funds to your account. Select a reliable payment method (e.g. Visa or Mastercard debit or credit card) where fees are low and the transaction time is within an acceptable range. Once the funds are in your account, you are ready to trade.
Make A Trade
After completing due diligence on an asset, you can get stuck into the markets once you identify a trading opportunity.
Ensure you know how much you are staking in this trade and that your strike price and expiry times are accurate to your market predictions.
Many fixed return options brokers will also have a built-in trading calculator to help traders understand these values.
Exit Your Trade
Fixed return options traders have two options to exit a trade. Traders can sell contracts to another investor for a market-agreed fee minus commission. Alternatively, a contract can run until expiry and will be settled for either $0 or $100.
FRO Trading Tips
There are a few more aspects for traders to consider when trading fixed return options:
Local Tax Laws
It is worth brushing up on the local rules regarding trading taxes. For example, some jurisdictions, such as the UK, regard fixed returns options as a form of gambling and are therefore exempt from tax.
However, other regions may enforce short-term capital gains tax on FRO yields.
Fixed return options are something of a grey area within Islam. Some religious leaders consider this form of trading as gambling and, therefore, not halal. In contrast, others perceive it as informed investing and, consequently, compliant.
Consult a local religious authority for guidance.
Final Word On Trading Fixed Return Options
Fixed return options provide a well-regulated, exchange-traded alternative to the often murky world of binary options. Traders can take advantage of specialized, US-based brokers and exchanges to make predictions on a modest selection of trading assets.
Capped losses, trading flexibility and straightforward trade mechanics make FROs a tempting vehicle. However, regional restrictions, limited payouts, and the lack of brokers supporting fixed return options may deter some investors.
See our list of the top fixed return options brokers to start trading.
What Are The Fixed Return Options Trading Hours?
Fixed return options market hours will follow the trading times of the underlying asset, for example, 24/5 Monday to Friday for forex. However, contracts may be available to purchase outside of these hours through some online brokerages.
Do Fixed Return Options Come With Trading Fees?
Fixed return options brokers often charge a commission when clients buy, sell or cash in on an in-the-money contract at expiry.
Is Fixed Return Options Trading Halal?
Opinions differ on whether binary and fixed return options are gambling or legitimate investments. It ultimately comes down to personal beliefs as to whether Muslim traders wish to engage with FROs.
How Can I Exit A Fixed Return Options Trade?
Fixed return options are exchange-traded, which means that investors can sell their contracts to other traders at the market price.
Is Fixed Return Options Trading Regulated?
The fixed return options market is primarily approved and overseen by the SEC in the USA. Individual brokers will often possess additional authorization and licenses from reliable bodies such as the CFTC.