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Exploring Expirationless Options

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CLEARWATER, Fla. (–NexTrade Holdings Inc. has begun discussions with the Chicago Board of Trade on the development of what would be a new class of derivatives products–expirationless options, or XPOs.

NexTrade said in a statement Jan. 5 that it and the CBOT will share information on the subject and “potentially work toward developing new CBOT financial products” that will make use of them.

NexTrade Holdings wholly owns the NexTrade electronic communications network, which was the first ECN approved by the Securities and Exchange Commission. It proposes to create the NexTrade Futures Exchange and has licensed the exclusive patent rights to expirationless options for international distribution from Economic Inventions LLC, Philadelphia.

The very idea of an XPO is in a sense paradoxical in that it seems to run counter to the premises of the Black-Scholes option pricing model, which treats American-style call options as increasing in value as the option period expands. The model identifies perpetual optionhood as a limiting case, in which the value of the “option” is equal to that of the stock itself. If that is so, there is no need for a separate product, since anyone who wants to capture that value can buy the stock.

A spokesman for NexTrade, Frank Bachinsky, said Monday that in his view the XPO would cost somewhat less than the underlying stock, in part because it would convey no voting rights. Asked about skeptics, he acknowledged their existence but said “if you talk to enough people, you’ll get the full spectrum of opinion about any new product.”

XPO contracts will, he explained, allow people to hedge and speculate in ways that don’t exist in the marketplace now, precisely because the derivative will have the same time horizon as the underlying asset.

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