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Perpetual options – what you should know

perpetual option

A perpetual option is an option without any pre-determined maturity date. This type of option is rare, and it is not found among the highly standardized options traded at regulated exchanges. Even if you leave the exchanges and do over-the-counter options trading, finding perpetual options available for sale can be difficult.

Alternative names for a perpetual option is non-expiring option and expireless option.

The basics

In finance, an options contract gives the holder (owner) a right, but not an obligation, to carry out a certain transaction. The issuer/creator of the option is known as the writer, and the writer is responsible for being the counterpart in the transaction if the options holder elects to exercise (use) the option.

Example: This option gives the holder the right to purchase 100 shares in Company CDE for $100 per share. The option can be exercised on any date, until the option has expired. The option expires on the 1st of July, 2022.

Normally, options have an expiry date. After the expiry date, the contract is no longer valid and the option automatically becomes worthless, because the writer of the option will not honour the option once it has expired.

Perpetual options are different, since they have no expiration date. They simply continue to be a valid contract, in perpetuity. The writer of the option has taken on an open-ended responsibility. (To end this responsibility, the writer can purchase the option and destroy it.) As long as the option is open, the writer is exposed to risk.

When can I exercise a perpetual option?

Since perpetual options are non-standard options, you need to check the options contracts before buying a perpetual option, to find out all the specifics.

With that said, most perpetual options that we have come across were of the type that could be exercised on any day. In that regard, they were similar to American-style vanilla options.

It is possible, however, for perpetual options to work in other ways when it comes to exercising. It would for instance be possible to write a Bermuda-style perpetual option that could only be exercised on specific dates, e.g. only on the 1st of every month.

Valuation

For exchange-traded standardized options contracts, models have been developed that are used to value and predict market price changes. Valuing and predicting the price movements of perpetual options is considerably more difficult, and there is also the problem of them not being standardized. The fact that they are not traded openly on exchanges also makes it difficult for academic researchers to obtain sufficient price data.

If you are used to standard options trading, you might be familiar with the Black-Scholes-Merton model used to price European-style options, and maybe also with the binomial and trinomial tree models sometimes utilized to price American-style options. All of these models run into trouble when applied to perpetual options, since the perpetual option does not degrade with time.

Some scholars have proposed using a Martingale model to price perpetual options.

Trading perpetual options

Perpetual options are not listed on exchanges. They are therefore only traded over-the-counter (OTC).

Most option writers do not write perpetual options, since it would mean taking on an open-ended responsibility. As long as the perpetual option exists, the writer is exposed to risk.

Russian options

The Russian option is a perpetual option with a lookback feature. The concept of the Russian option was outlined by Larry Shepp and A.N. Shiryaev in the academic journal ”Annals of Applied Probability”. As far as we know, Russian options are not actively traded anywhere, and if they were created they would most likely be very expensive to purchase since they are so beneficial for the holder.

  • Since the Russian option is perpetual, the holder can wait however long to exercise it.
  • Since the Russian option has a lookback feature, the holder can elect to exercise the option at the most favorable historical price (during the lifetime of the option), regardless of the current price situation.

About the name: There is nothing especially Russian about Russian options. There is a tradition of naming option-styles after countries and geographical regions, simply to differentiate them. European-style options aren´t traded only in Europe, American-style options are not particular to America, Bermuda options were not invented in Bermuda, etcetera.

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