XPOs: the next big thing?

[BlueHorseshoe]

Came across a discussion of Expirationless Options (XPOs) on another website. Find some background material at the link below ...

Hopefully I'll get around to reading this stuff within the next few days. Still, would be interested to hear what our in-house options experts think. (Someone did mention that the exchanges are looking at XPOs for potential as new product launches.)

http://www.nextrade.com/whitepapers/

 

[ktm]

I did some reading and came to the conclusion that they might be near worthless. The tracking against the underlying, compared with the relationship and similarity to SSFs gives them little utility.

Let me know if you find otherwise from your reading. I am always anxious to throw a new product into the mix.

 

[BlueHorseshoe]

Quote from ktm:

I did some reading and came to the conclusion that they might be near worthless. The tracking against the underlying, compared with the relationship and similarity to SSFs gives them little utility.

Let me know if you find otherwise from your reading. I am always anxious to throw a new product into the mix.

Well, their utility re: SSFs quite obviously is the limited risk of a long position, in either Calls or Puts, as opposed to SSFs.

My initial thought is, without time decay who would sell them?

 

[TempusFugit]

Quote from BlueHorseshoe:

Well, their utility re: SSFs quite obviously is the limited risk of a long position, in either Calls or Puts, as opposed to SSFs.

My initial thought is, without time decay who would sell them?

Who would sell them? Not retail traders, only market makers who would set very wide b/a spreads and upon sale immediately hedge with the underlying on the other side...sorta like LEAPs.

 

[Maverick74]

Why would anyone trade these things. They have no gamma. Gamma is the only reason to trade options. Without gamma all you have is a leveraged underlying product.

 

[BlueHorseshoe]

Quote from Maverick74:

Why would anyone trade these things. They have no gamma. Gamma is the only reason to trade options. Without gamma all you have is a leveraged underlying product.

Well, I beg to differ. Like I said above, they could make attractive vehicles for buying/shorting stock while maintaining a finite, limited risk of loss, under all circumstances, and with minimal commission expense. No worries about watching your stops get blown through, or having to roll your protective puts/calls every few months on a long-term position. And of course never having to pay Theta.

As long as Setharb and his MM buddies keep the spreads reasonable XPOs could have a meaningful place in the market.

 

[Maverick74]

Quote from BlueHorseshoe:

Well, I beg to differ. Like I said above, they could make attractive vehicles for buying/shorting stock while maintaining a finite, limited risk of loss, under all circumstances, and with minimal commission expense. No worries about watching your stops get blown through, or having to roll your protective puts/calls every few months on a long-term position. And of course never having to pay Theta.

As long as Setharb and his MM buddies keep the spreads reasonable XPOs could have a meaningful place in the market.

Any why can't you do this with single stock futures?

 

[BlueHorseshoe]

Quote from Maverick74:

Any why can't you do this with single stock futures?

I answered your question directly in the post you quoted.

Namely, that XPOs would offer a finite, inviolable max loss whereas protective stops on SSF can always get blown. Moreover, for long term positions, SSFs inevitably expire, requiring an exercise or roll & thus inucurring more commissions.

XPOs would essentially offer an embedded protective stop at lower commission expense vs. SSFs.

 

[Maverick74]

Quote from BlueHorseshoe:

I answered your question directly in the post you quoted. Read it again and if you still have questions perhaps someone else will have the patience to walk you through it.

No you didn't answer my question. An XPO is nothing more then a juiced up single stock future. How do I know this? Because when you look at the graph that is provided on that PDF file you can calculate the slope of the stock vs the slope of the XPO and you get essentially the same return as the single stock future when you factor in minimum margin maintenance. See the problem you have with the EXPO is the amount of capital outlay in comparison to the single stock future. You are putting up more capital for less leverage. The single stock future behaves in a very similar way to the XPO on a margin return basis.


And single stock futures have not exactly taken off and the reason for this is that there really isn't any edge in trading them outside of margin reasons. I really can't see the utility in trading these. If you don't want to put up the capital and and don't want to pay theta, trade the SSF's. If you want gamma, you trade the options. I can't see where the XPO fits in anywhere. I know they are trying to market this for the retail investor but I can't see why the retail investor would buy or sell these considering that the retail investing community is comprised of buy and hold type strategies. Maybe I'm wrong here, but if someone else wants to jump in here and explain how you can trade a gamma-less option for profit I would be very interested.

 

[Maverick74]

Quote from BlueHorseshoe:

I answered your question directly in the post you quoted.

Namely, that XPOs would offer a finite, inviolable max loss whereas protective stops on SSF can always get blown. Moreover, for long term positions, SSFs inevitably expire, requiring an exercise or roll & thus inucurring more commissions.

XPOs would essentially offer an embedded protective stop at lower commission expense vs. SSFs.

OK, sorry you edited that post before I got my reply out, yes, I can see the value in using these as protective sell stops however, that is not enough reason to create any kind of decent liquidity, the spreads on these will be horrible if they ever come to pass.