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To: Ira Player who wrote (11099)	1/7/2004 8:02:24 PM
From: Dan Duchardt	Read Replies (2) \| Respond to 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.

To: Ira Player who wrote (11099)	1/8/2004 12:30:08 PM
From: LPS5	Read Replies (1) \| Respond to of 12617

Thinking about it a bit more, now: why would I choose an "expirationless option" over a warrant, assuming both are available with respect to some reference security? LPS5

To: Ira Player who wrote (11099)	2/12/2004 4:08:04 PM
From: Tech Master	Respond to of 12617

Ira: Unfortunately I also disagree completely with your pricing thesis. Please objectively consider the following examples: Owning a non-expiring option is never exactly equivalent to owning the stock EXCEPT at a strike price of zero. At all positive strike prices, additional acquisition costs, potential dividend windfalls, bankruptcy risk (for non-zero exercise priced options), as well as the ability to create a dividend on a non-dividend stock will all force the price of the non-expiring call option below the price of the stock. One could point out that suggesting that the strike price does not matter is to also suggest that the price of the stock does not matter. I could sell the non-expiring call option and buy the stock for only transaction costs. I would have no risk since ownership of the stock hedges the call option. This effectively would create the means to take over any company for merely the transaction costs of selling options and buying the stock. I've heard this scenario described as the Zero-Cost Takeover Paradox...clearly an untenable market situation. Say that I want to create a "dividend" on a stock that does not currently pay a dividend (assuming that I own the stock), I can simply "create" one by selling the non-expiring call option, deposit the proceeds in a bank and collect a dividend. If it gets exercised, I get paid the strike price. If it NEVER gets exercised, my return is INFINITE. Not too shabby. Finally, if the non-expiring call sells for the same price as the stock, and the non-expiring put sells for a fraction of this, I can sell a few calls, buy enough puts to protect my entire position and still have upside potential with no downside risk. I would have effectively created a collar with no risk and no expiration at no out of pocket cost by using only a fraction of my position (while maintaining the vast majority of unrealized upside potential). I would humbly suggest that EVERY person that owns a stock would pursue this strategy- again untenable. These three simple examples should help you to understand why a non-expiring option cannot have the same price as the underlying stock without creating "dominant" or "dominated" securities ala Merton. Otherwise, I would sell call options all day long at 90, 85, 75, even 60% of the stock price. Its just like a swap - you are betting the floating rate (or alternative investment return) is higher than the growth of the stock. It certainly does not make sense to say that an option with a positive strike price has the same value as the stock - you would be providing somebody a loan for free when you buy at that price. I hope that you find these comments and examples to be helpful. It take a while to get your arms around such a big new concept but when the lightbulb goes on... bling! FWIW- expirationless options are now part of many graduate programs on options and options theory including at Wharton School of Business. Happy trading, TM