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Strategies & Market Trends : The Final Frontier - Online Remote Trading
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To: Ira Player who wrote (11102)1/7/2004 11:37:34 PM
From: Dan Duchardt   of 12617
 
infinity is a long time

It certainly is!!!

Obviously, at infinite time, the options with a 0.5 strike and the option with a 1.5 strike are identical and must have the same value.

I don't get to construct the formula, but I think we can agree that these options will be designed so that if they ever get DITM they will track the underlying dollar for dollar and will have only intrinsic value. The .5 strike call will have one additional dollar of intrinsic value compared to the 1.5 strike call. As a percent of a $1000 stock, this dollar may be insignificant, but it is still a dollar.

Your point is well taken that the pricing of an option that lasts forever has some problems, but as with current options there is a cost of money factor involved. And there is still the risk of the option becoming worthless if the underlying disappears. In practical terms, it is unlikely that far out of the money options will be offered by the market and will only come into existence if the underlying makes a substantial move. If the underlying survives and someone wants to hold the options for 100 years hoping they will some day have value, they are free to do so, but by comparison to other investments that is not very attractive.

I'm sure the smart guys who are inventing these things will come up with a way of pricing in the non-expiring attribute without raising the premium to infinity but still retaining the pain of being highly leveraged when the thing moves against you.
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