Perpetual Options

Discussion in 'Options' started by riskfreetrading, Jan 31, 2008.

  1. A perpetual option is an option that never expires (the expiration time is infinity). Does anyone know whether such options trade (or are considered for trading in the future) in a US exchange? I have read somewhere that the Philly exchange was considering them, but I do not know whether that is true or not.

    I am also interested in reading views on their practical utility, pricing, etc.
  2. Not sure how you would price that sort of option. In my years even trading OTC exotics there is no such option other then trading the underlying. My office is right in the Philly Exchange building and I talk with many of my ex mates who are still on the floor and not a word from them or the marketing department here.
  3. The Philly exchange was touting them at the Trader's Expo or Money Show two years ago and handed out materials on it. But nothing since then. I cannot see how they could price perpetual calls since the loss of a seller can be infinite. Only thing they can do is hedge completely and hope enough volume comes in to make money off of the spreads.

    Since I have not heard anything else since, I am sure it is now a dead issue.
  4. H*Pi


    Most perpetual option are priced over the counter using BSM with 100-year duration. There are other closed form solutions, but most are avoided and using BSM in their place.
  5. That is exactly one of the questions I had in mind. Assuming a positive carry, here is how the put can be priced. You compute what is known as the exercise boundary (there is a theoretical formula for this). Once the stock is at or below the exercise boundary, then the put value is the difference between the strike and the underlying.

    You can also reverse the argument above. Any current stock price is an exercise boundary of the lowest strike K*. You compute K*. For puts with a strike higher than K*, their price should be K-S, where K is the strike of the put and S is the price of stock.

    I did do the work as I assumed that someone must have done it.
    But my sense is that once you know the price of one of the options (put for instance) at a given strike, you just use the no arbitrage arguments to price the other options at the other strikes.

  6. Ahh..exp-less options…I saw it at Vegas Trader's Expo…Presented by some Euro guy with two incredible hot bimbos next to him
  7. H*Pi


    Riskfreetrading, you are attempting to price a Russian vanilla put, but you are terribly wrong in your attempt. You say you have priced these before? When would you assume negative carry?

    I think you typed "perpetual option" in google and somehow got confused.

    Would you please answer my question from the other discussion? When would on choose a CC over a short put at the same strike and expiration? You were wrong and I was hoping you could answer correctly at this time. Thank you.
  8. Do you mean that the price of the call would be infinite or that the loss can be infinite? (The losses of the stock can infinite, but the price is finite).

    Assuming that you mean that the call price will be infinite, that was also something that, at first, I thought would be the case. But after second thoughts, I think that the price of the call would be finite (althought it seems counterintuitive)

    My reason for rethinking it is that if price of the call were to be infinite, then one can make covered writes (which will be at a net credit if call price it too large/infinite) and use the net of this position to acquire additional stock. Which means that one can control the whole underlying starting with 100 shares and repeating the process.

    This is just an initial idea, and is incomplete. But my sense is that arguments like the above would exclude the price of the call from being infinite.
  9. H*Pi


    A raw pricing algorithm would entail pricing a 100-year American call from BSM. Or solve for delta using BSM of blended duration and multiply by price of underlying. This was the standard, best practice in the OTC World, at least until 1999. "Russian" perpetual lookback option are common among banks.
  10. #10     Jan 31, 2008