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Strategies & Market Trends : The Final Frontier - Online Remote Trading

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To: TFF who wrote (11098)	1/7/2004 3:41:56 PM
From: Ira Player	Read Replies (3) of 12617

I'm very confused about the utility of such a product. A little mind experiment... Thesis: If the option has no expiration, owning the option is exactly equivalent to owning the stock, regardless of the strike price, risk free interest rates or Implied Volatility. (The variables in pricing an option.) Reasoning: An option can never be worth more than the then current stock price. In other words, buying a stock is equivalent to buying an option with a strike price of ZERO. Therefore the upper bound of an options value is the then current stock price. The strike price is not material in valuing these options because it never comes into play. The option never has to be exercised, since it won't expire and can always be sold to someone else. Without being forced to exercise, the Strike Price doesn't matter. It is effectively ZERO. An option to buy a stock with a strike price of ZERO is equivalent to owning the stock. Therefore, the lower bound for an option with no expiration is the then current stock price. Upper and lower bounds are the same...without even looking at Implied Volatility. Ira

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