To deal with fluctuations in the price of stuff they have to buy, big companies have futures markets, which allow them to lock in a rate that they know they're going to pay for a certain amount of time. So even if a war in the Middle East sends the price of oil through the roof, or a plague hits cattle ranches in Brazil, shipping lines and fast food chains can give themselves time to figure out how to adjust.
Those are all hedges against natural occurrences, though — an option to buy at a certain price in the future is way to insulate yourself from a volatile market. Now, though, a new business has developed a way for individuals to protect themselves against artificial price shocks.
What am I talking about? Well, think about the market that regular people deal with most where they have the greatest amount of money at stake: Buying a plane ticket. Airlines allow their prices to change in response to demand, which creates its own kind of volatility — and anxiety over making travel plans as prices change on a minute-to-minute basis is a feature of the modern condition.
It sure would be nice to have the same ability that companies have to freeze that process, letting your travel plans evolve without the fear that you'll be gouged at the last minute. That's the central insight behind a new company called Options Away: If you're not sure you want a certain set of dates, you can pay some money for the right to purchase it at the same price within a certain window.
"We're just helping them with a little peace of mind," says co-founder Rob Brown, who launched the site for consumers in September 2013. The company has a set of patented algorithms that assess the value of the option, taking into account factors like the holding period, the season and how much that kind of ticket tends to fluctuate. If the price jumps a lot before the option expires, and the customer decides to buy, Options Away loses some money — but it's betting that in the aggregate, the fees people pay will keep it in the black.
There are obvious differences between the airline ticket futures market and other kinds of futures markets. For one thing, there's not really any way for speculators to take the other side of the trade — it's not like people who don't actually want to buy tickets will make lots of money betting against those who do. For another, the hedge is more a response to potential future changes in a consumer's personal schedule, rather than the price of the underlying commodity.
But Options Away could serve a similar purpose as futures markets do, as a leading price indicator of actual demand, allowing the airlines to better tweak their schedules to match it. "This happens in the financial markets, when people wake up in the morning, look at the futures market, and see what's going to happen with the underlying market," Brown says.
And airlines aren't the only goods one might want to hedge: These days, everything from hotels to rental cars to taxi rides is dynamically priced. Could the product expand to other categories?
Brown says they're thinking about it, but right now, it's a little trickier — airline tickets still have the biggest spread, and are hardest to cancel at the last minute, giving them the strongest case for risk avoidance. But as dynamic pricing becomes even more pervasive, it's natural to expect that companies will provide more ways to help people keep their options open without paying through the nose for last-minute decisions. And then, who knows, maybe regulators will have to get involved as well.
"I hope so, because it means we're doing about $8 billion in revenue," Brown says.