Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : The Final Frontier - Online Remote Trading -- Ignore unavailable to you. Want to Upgrade?

To: TFF who wrote (11098)	1/7/2004 3:41:56 PM
From: Ira Player	Read Replies (3) \| Respond to 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

To: TFF who wrote (11098)	1/8/2004 10:53:56 AM
From: LPS5	Read Replies (1) \| Respond to of 12617

[E]xpirationless options. To me, the concept of an expirationless option is somewhat nonsensical; what currently unmet need does it address? It seems to me little more than an attempt to securitize the decision that all market participants have in front of them anyway: buy, sell, or...don't. And, I suppose that ways of thinking about (or calculating values for) a non-decaying, contingency instrument would be either (or a combination of) (a) a variation on obscure, annuity-like instruments called perpetuities, or (b) "reverse" limit orders. Strange, but somewhat interesting. LPS5

To: TFF who wrote (11098)	2/12/2004 3:26:24 PM
From: Tech Master	Respond to of 12617

LPS5: Expirationless Options (XPOs) are simply plain "vanilla" American-style options without expiration dates. They provide many structural advantages over many other financial instruments. XPOs offer a lower-cost alternative to a traditional stock purchase when dividends or voting rights are unimportant. XPO puts have less risk than a short stock position since they limit the downside risk to the option premium and also offer strike price selectivity. An XPO put would not require stock borrowing, an interest cost on the stock loan or theoretically unlimited risk. Of course, XPOs offer also an advantage over expiring options by eliminating expiration risk. XPOs can be used to hedge short option risk at less cost than can accomplished by using the underlying stock. Information is available on-line at nextrade.com that includes several white papers and an XPO pricing model for dividend-paying stocks developed by Dr. William Margrabe. Dr. Margrabe does not deviate from incumbent theory with his approach to pricing XPOs on dividend-paying stocks and its probably a reasonable starting point for the market. However, I believe that XPO prices will trade closer to current LEAPS prices as the product matures in the marketplace. I believe that XPOs will become an important new option product for many of the reasons that Dan Duchardt mentioned in earlier discussion. XPOs will allow the creation of strategies that currently are not available in the marketplace or make many existing strategies even better. XPOs are truly a new bridge between the underlying stock (or asset)and tradional expiring options. Happy trading, TM