The exact same conundrum faced with those who are long-term investors in American stocks. Simply replace volatility with earnings.
Maybe it is true. Some time ago Thorpe (The guy that wrote 'Beat the Dealer') wrote a paper on warrant pricing where the warrant had a very long term left to expiration. I believe he postulated a formula for calculating the value of the warrant that was not too far off the Black-Scholes methodology for option pricing. Since a warrant is a proxy for a stock (ex dividend payments) maybe there can be an option that does not expire. Is my memory correct? Anybody remember this paper?
These guys were also at the D.C. Money Show. Their XPO materials were silly because they talked about covered calls. When would you ever get assigned if you sold an XPO? Whoever is long would simply hold on to the long call and sell at some point- no incentive to exercise. Interesting idea but cannot see it doing well since sellers will have unlimited and infinite risk... Only thing I do remember is the woman at the booth was the hottest one in the conference and was dressed pretty slutty...
Now that I think about it more, I have to agree. It all comes down to this: Why would sellers take on infinite risk, both in time and in price? They wouldn't, or if they would, the premium would be so high, as compared to LEAPS, that it would scare away buyers.
more news... according to CBOE rep , VIX options coming "sooner that everyone might think" , maybe in JAN 06.
You make it really expensive. In a paper on that web site, http://www.xpotrade.com/pdf/LEAPSvsXPOs.pdf , they give an example in which a slightly ITM no-expire option on a stock with 27.7% volatility costs around 50% of the price of the underlying. Looking at the LEAPs for a stock that has similar volatility, PG, I'd say the no-expire options are priced like LEAPs a couple decades away from expiration. Maybe someone with a Black-Scholes calculator can come up with a precise answer.
It'd also be interesting to see how the no-expire options morph as corporate actions pile up during the lifetime of the option. Imagine the chain for an option in T purchased 25 years ago...
An option dated a couple of decades away is very different to an option which doesn't expire - ever. Having played with the BS model this is how I see them behaving; ***** Where the carry costs are negative (stock yield is less than risk free rate), as you go further and further out in time the Calls ultimatley will trade at the underlying value and the Puts will trade at zero, this regardless of the strike. It's akin to buying the underlying - an expirationless option call will track the underlying point for point, it has to - think about it. There will be no market for expirationless Puts because regardless of strike they will be worthless. ***** Where carrys costs are zero again Calls will trade at the underlying regardless of strike, but Puts will always be worth the strike. ***** Where carry costs are positive (yield exceeds risk free rate) Puts become priceless ! ***** This whole concept is a mess, where Put/Call parity breaks down and a volatility value has infinity. Ask yourself, why has this never been done before ? I still say it's a wind-up.