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Strategies & Market Trends : The Final Frontier - Online Remote Trading
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To: Ira Player who wrote (11099)1/7/2004 8:02:24 PM
From: Dan Duchardt  Read Replies (2) of 12617
 
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.)

Antithesis: An option that never expires has all the value components of traditional options, except for time decay. In other words, the premium becomes a function of the probability of the option having intrinsic value someday instead of within a definite period of time. In effect this just eliminates the "theta" price component of a traditional option, but retains a component that reflects the volatility of the underlying stock or index. It is not equivalent to owning a stock because the option value will scale in a non-linear manner similar to the short term price variations of a current long term option or LEAPS, with a delta that is a function of the difference between stock price and strike price. Such an option could be attractive because of the limited loss associated with a stock becoming worthless (for calls) or increasing substantially (for puts), while offering the potential for substantial gain if the stock increases or decreases substantially in relation to the strike price.

Actually, I believe there is already an example of a similar thing on the market. If you look at their behavior carefully, the 2x Profunds and the 2x Rydex funds are somewhat similar to non-decaying options. They are not exactly the same thing, but their behavior to the downside is similar to an option that never expires, although I expect these funds drain off some value over time if the underlying index never moves.
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