I love this analysis, and the "resetting everlasting option" would clearly be awesome.
Unfortunately, I think it may be impossible (which is why I prefer the EMA-strike everlasting option as a solution for this problem)
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We can price everlasting options because they are equivalent to a basket of expiring options.
In the 4000-strike put case, we have .5 4000 strike puts expiring at the next expiry, .25 4000-strike puts expiring the expiry after that, and so on
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at the next expiry/funding payment time, that closest .5 of a contract expires, and we are left with .25 4000-strike puts expiring at the next expiry, .125 4000-strike puts expiring the expiry after that, and so on
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we then pay the mark price to double our position in all of these, so we again have .5 4000-strike puts expiring at the next expiry, .25 4000-strike puts expiring at the expiry after that, and so on
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resetting options present two problems here.
let's say the last strike was 4000, but the new strike would be 3500
we currently have .25 4000 strike puts expiring at the next expiry, .125 expiring at the expiry after that, and so on
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(1) the current mark price reflects the price of the basket of 4000-strike puts, not the price of a basket of 3000-strike puts.
how much do we need to pay to put on a basket of 3000-strike puts? it's not clear
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(2) we want to have our entire everlasting option have strike 3500 after we pay funding, but we have .25 4000-strike puts expiring at the next expo in our equivalent portfolio, which our pricing model will somehow have to account for
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all of this is pretty confusing. it's possible we can get around it by constructing a type of exotic option with resetting strikes, but i'm not entirely sure what it would look like
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the one i AM sure of is the EMA-strike Asian everlasting option, where the strike price is the exponential moving average of the price of ETH with a half-life of e.g. a week
these asian options *can* be priced (although it's hard), so all the funding fee math works out fine
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i think there are ways to make this better by picking different priceable exotic payoff structures
and one of them may even give you the effect of the resetting option
it's possible i'm missing something really obvious here
if you have the answer... let me know
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So, I *think* this works:
1) funding payments once/day
2) funding = current px - intrinsic value
3) expires once/day
4) each day, the strike price is determined at the start (-$500 from index)
5) the actual market px of this will be complicated but I think it works?
this isn't actually any worse than normal everlasting options; already it's the case that a $2k strike put expiring tomorrow is a totally different product from a $2k strike put expiring today
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Yes. This is great. But one subtle point needs to be introduced. The time value of money. Future payoffs you are treating equally as todays ITM option. The future payouts must be discounted by an appropriate discount rate before taking the weighted average...
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An issue is if strike resets every day it only hedges against a large intraday move. If spot drifts lower over time pushing the strike away it doesnt help the hedger.
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