Alpine Summit

Tuesday, July 05, 2005

An interesting take on Kelo

Voluntary Xchange has a great perspective on how Kelo might be applied to stock options. He takes a couple of liberties with the situation, but makes a good argument anyway (as far as a "what if" scenario goes). A case cited as support for the Kelo decision is Barron v. Baltimore (1833).

I do see Kelo doing to real estate what it would do to the options market- making them less popular and hence, less profitable. People would be too afraid to invest in anything popular because they would be paying to buy a security at a given (strike) price, and there would be no guarantee that their security wouldn't be bought by someone else before they could sell it at a higher (exercise) price. So, you would have a whole bunch of securities trading for their given strike price all over the place. Naturally, the only winners here are the brokers making a commission. This means people would look for less popular securities in which to invest so they could be assured of selling at the X-price before someone else decides to buy their security at the strike price. Those would gain in popularity and the overall velocity of money in the options market would slow down meaning less profit all around.

I guess this could be a refutation of voluntaryXchange's argument, but I doubt the government would be smart enough to see the long-term effect Kelo would have on the options market. Also, we're talking about state governments anyway. I believe the options market is solidly in federal jurisdition- in which case, the fifth amendment would actually apply. It would indeed be cool, though, to buy Google options at $50 and turn around and sell them for $250. But arbitrage rarely lasts.