Binary Return Derivatives were recently introduced to the market by the NYSE Amex and this binary option is one of the newest derivative products to hit the market. In this article, the staff of the NYSE discusses the two forms of this new product and highlights the opportunities for investors.
Binary Return Derivatives (ByRDsSM) are "binary" options with a potential per-contract fixed return amount of $100.00. ByRDs were launched by NYSE Amex on April 21st, 2016 and are one of the newest derivative products available to the individual investor.
ByRDs are available in two forms: Finish HighSM ByRD and Finish LowSM ByRD. A Finish High ByRD is similar to a standard listed call option in that an investor purchasing a Finish High ByRD is bullish on the underlying security. A Finish Low ByRD is similar to a standard listed put option in that an investor purchasing a Finish Low ByRD is bearish on the underlying security. An investor long on a Finish High ByRD receives $100.00 if it is in the money at expiration whereas an investor long a Finish Low ByRD receives $100.00 if it is in the money at expiration.
ByRDs are currently listed on 19 equities and ETFs with more expected additions in the near future. ByRDs are cleared and settled by the Options Clearing Corporation (OCC) and can be bought or sold anytime during the life of the contract. ByRDs have expirations every Friday for five consecutive Fridays. ByRDs are European style exercise, are cash settled, have unique symbols with $1 strike price increments and trade in pennies.
Many of the strategies used with standard listed options will work using ByRDs. For example, just as calls and puts may be used for speculating on volatility in an underlying security or ETF, so too can ByRDs. The defined risk offered by ByRDs makes them an attractive tool for use in income-generating strategies and in situations where assignment of a short position would result in a sale of stock and a taxable event. In addition, combining two ByRD spreads will create a risk-return profile similar to complex strategies such as Butterflies and Condors.
While ByRDs are similar to standard listed options, there are differences in settlement that should be understood. ByRDs settle based on an all-day expiration day volume weighted average price (VWAP). The VWAP is calculated and disseminated at least every 15 seconds every trading day. Since ByRDs settle based on the VWAP, whereas standard options settle based on the underlying closing price, the closing values may differ. A trader using ByRDs must pay attention to both the underlying price and the VWAP, with special attention to the VWAP on expiration day.
Another notable difference between ByRDs and standard options is the maximum gain and loss characteristics. A long ByRD has a maximum gain of $100.00, minus the premium paid, whereas standard call options have an unlimited upside potential above break-even for calls and a substantial upside potential for puts. On the short side, the maximum gain is the same for ByRDs and standard options, which is the premium received. The risk, however, is very different. ByRDs losses are limited to $100.00, less the premium received. Whereas short uncovered calls carry unlimited risk and short uncovered puts carry risk equivalent to the underlying stock.
In conclusion, ByRDs are a unique tool that can enhance an investor's ability to benefit from various market conditions and expectations.
This document is provided as a summary for reference purposes only and may not be comprehensive or authoritative. For specific details regarding ByRDs or for additional information, please go to www.nyse.com/byrds or email us at email@example.com.