It’s not often that I write about specific websites here on the blog, but Options Away really caught my eye. The idea is very simple. You can pay a small fee up front to lock in your fare for a certain period of time. Then you can buy the ticket at that fare before the time limit expires. If you’re used to flying United, this might sound like FareLock. It is, but it’s much broader than that.
What I found interesting was that the founders of the company aren’t from the airline world at all. In fact, they’re financial-types and that’s why they saw the opportunity. If you’re familiar with the idea of a stock option, this is the same basic premise.
Before we talk about the product, let’s talk about where these guys got their inspiration… on Wall Street.
Let’s say you’re bullish on United’s stock skyrocketing but you don’t want to invest the money to buy the 1,000 shares at $36.98 each (that’s $36,980 total) that you want. Instead, you find a third party that is willing to sell you what’s called a “call option” on the stock. That let’s you pay $5 per share ($5,000 total) to lock in a set price (let’s assume in this case it’s the same $36.98) for you to buy those shares over a fixed period of time (let’s say two years).
Flash forward two years, and United is now trading at $56.98 per share. Since you hold those options, you can now buy 1,000 shares at $36.98 each ($36,980) and then immediately sell them at market price of $56.98 ($56,980). In reality, you never have to shell out any money. You just get $20,000 in your pocket. Congratulations. You’re initial $5,000 investment just paid itself back plus $15,000.
On the other hand, if United’s shares today are worth $25.98, your options are “under water” and are worthless. You lost the $5,000 you invested. But that’s really the point of these options. The investment is much less than buying actual shares, but it limits the upside and sets a fixed price for the downside. You’re paying to reduce your risk, and that’s the idea behind doing this with airline tickets.
Now, instead of thinking about the value of United as a company, think about the value of a plane ticket. You do a search and find that you can buy a ticket from LA to Chicago for $402.38 in September.
You’re fine with the price, but your plans haven’t completely gelled yet. You might have to go out a day later. And on the return, you aren’t sure if you can get a ride at that time of day. You’d hate to see the price go away but on the other hand, you’d hate to get stuck with a $200 change fee. Instead, you decide to pay a little to lock it in now without purchasing the ticket.
As you can see above, Options Away offers call options at varying prices depending upon how long you want to guarantee it. The longer you hold it, the more expensive it costs, as you would expect since it’s easier to predict pricing for a shorter period of time.
The 24 hour hold is easiest. You can always buy a ticket and then get a full refund within 24 hours. This one just lets you hold it without paying (as American will let you do today, but most make you pay). There’s no real risk here so the cost is low.
After that, the pricing is solely at the discretion of Options Away. The airline isn’t taking any risk here. Options Away is the one that has to build a big fancy algorithm that will help determine how it should price these offerings. In the end, the company has to hope that it earns more money off selling options than it loses having to pay the traveler the difference between the locked in fare and the current price. If you buy an option to hold it for 21 days, then you’ll pay $36. And if the price goes up within that time, you can still buy the ticket for $402.38.
You might think that $36 on an expensive ticket is a lot of money. And it is, but you’re guaranteeing the fare for 21 days. A lot can happen in that time and the price has to reflect that risk accordingly. That’s why I tend to think that the 3 day hold for $9 may be the more popular option. People don’t like feeling pressured into buying things immediately, but with airlines, you worry a lot about the price changing. This provides a guarantee that it won’t.
What do you think? Would you ever use this?