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Strategies & Market Trends : The Final Frontier - Online Remote Trading
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To: Tech Master who wrote (11176)2/14/2004 6:08:50 PM
From: Jon Tara  Read Replies (1) of 12617
 
"Why would anybody want to buy a stock again once an XPO on it is available? All the bang (less a dividend or voting rights, of course) at a fraction of the cost.... with no time decay."

Because the XPO has a strike price.

Any time the stock is below the strike price, the XPO has no intrinsic value, just like any other option.

So, here is the risk, and part of the reason why an XPO must be priced below the stock price: there is a risk that the stock will trade below the strike price "forever".

Buy an out-of-the-money XPO, or an in-the-money where the stock price subsequently falls below the strike price. Then have the company taken over at a price below the strike.

Ouch, ouch, ouch, ouch!

So much for perpetuity.
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