New Super LEAPS with 15 Years of Maturity

[berkshiremystery]

Here's some interesting article about new "Super Options",... some type of new LEAPS that have a maturity range of 15 years.

 

http://www.fool.com/investing/options/2012/09/11/span-langenthis-new-tool-could-change-long-term-i.aspx

 

CBOE Holdings' (Nasdaq: CBOE  ) Chicago Board Options Exchange has asked the Securities and Exchange Commission for permission to issue a brand-new type of option. If approved, it could act as a replacement for regular stock and potentially change the way you invest.

 

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Taking a LEAP

Many long-term investors ignore the options market because the lion's share of options trading involves short-dated options. With new options expiring every month, traders often try to take advantage of options either to capture small gains on a regular basis or to take a longshot at a big payoff if a stock moves dramatically.

 

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TARPs superheroes are already flying

All this may sound theoretical, but investments very similar to ultra-long-dated options already exist. In connection with the TARP bailouts in late 2008 and early 2009, the U.S. Treasury obtained warrants from the financial institutions to which it provided capital. These warrants typically had 10-year expirations and gave the Treasury the right to buy additional shares at a specific price, closely resembling a call option. They don't trade in anything close to the volume as their underlying stocks, but they do trade. For instance, Bank of America (NYSE: BAC  ) , Citigroup (NYSE: C  ) , and Hartford Financial (NYSE: HIG  ) are just a few of the many financial institutions with outstanding long-dated warrants.

 

 

 

 

 

 

[rmitz]

That'll be very interesting.  Of course everything will depend on the price, but if they're priced according to Black-Scholes, there will probably be some structural undervaluation.

[LC]

That'll be very interesting.  Of course everything will depend on the price, but if they're priced according to Black-Scholes, there will probably be some structural undervaluation.

 

From what I've heard, professional options traders/market makers don't use B-S to model prices anymore.

[racemize]

That'll be very interesting.  Of course everything will depend on the price, but if they're priced according to Black-Scholes, there will probably be some structural undervaluation.

 

From what I've heard, professional options traders/market makers don't use B-S to model prices anymore.

 

In that case, why does anyone talk about B-S anymore?  (I can't help but find it funny that we refer to as BS).

[LC]

That'll be very interesting.  Of course everything will depend on the price, but if they're priced according to Black-Scholes, there will probably be some structural undervaluation.

 

From what I've heard, professional options traders/market makers don't use B-S to model prices anymore.

 

In that case, why does anyone talk about B-S anymore?  (I can't help but find it funny that we refer to as BS).

 

Well, it's the "textbook" model. Everyone who goes into finance learns it, or at least learns about it.  It's taught in universities everywhere, and is the accounting standard for reporting on stock options. None of that makes it a "correct" model.

 

Options traders think of it as a right of passage: everyone in their profession learns the ins-and-outs of it, but then it is never used in practice.

[eclecticvalue]

Then what are option traders using then. I have always wanted to figure out how to find undervalued options, more specifically undervalued leaps but I haven't gotten around that yet.

[Guest rimm_never_sleeps]

these could be very interesting the first few weeks they come out till they tweak their models for the longer duration. supposedly bs is not optimal for valuing longer dated options. I believe a lot of options are still valued by bs. just look at all the option calculators online. even on this board you will see many posts that claimed bac warrants were fairly or overvalued based on the implied volatility input.