I’ve been spending the last few weeks reading about financial independence and early retirement (colloquially known as FIRE; there’s a good subreddit for it) because of their natural intersection with travel hacking. Roughly, if the goal of financial independence is to save more, then travel hacking is an incredibly useful tool for those who travel a lot or have large families because of the way it can minimize expenses and free up money to save or invest.

I could have stopped there, but of course, being me, I got interested in reading up on investing, at which point I had an interesting realization:

Airline Miles are Stock Options in Disguise

For those of you who are unfamiliar with stock options, as a consumer (i.e. not a creditor), you have two varieties:

  • Call option
  • Put option

Each come with some sort of fee (‘the premium’) for the privilege of having the option to buy or sell stock at some particular price. So a call option gives you the privilege of buying a stock at some fixed price and a put option gives you the privilege of selling a stock at a specified price, irrespective of the stock price at the time of exercise. In the case of a call option, you make money when the market price for the stock is higher than the price you are allowed to buy at, because you can turn around and sell immediately at a higher price. The reverse is true for a put option.

The ‘option’ part of the names comes from the fact that you can choose not to exercise if the resulting action would cause you to lose money. If you opt not to exercise, all you lose is the premium you paid to buy the option, which limits downside. You can read more about options in this tutorial from Investopedia.

How do these relate to airline miles? Regardless of how you calculate, airline miles (and hotel points) have some cost.  That cost comes in the form of opportunity cost of using an airline card instead of a 2% cash back card or real cost from buying miles from an airline directly.  With the help of some manufactured spending, my cost is about 0.6 cents per airline mile.

Think of the miles then in batches of points required for a particular flight. For simplicity, let’s assume all flights cost 12,500 points (the typical price of a one-way domestic ticket). I’ll generalize this in a bit. That means, then, for every 12,500 airline miles that I acquire, I have acquired the option (more precisely, a call option) to buy a one-way domestic ticket at some point in the future at a cost of $75 (0.6 cpp). The cost of my miles ($75) is the premium, and the flight itself is the stock involved in the option.

Just like with options, if I never use my miles and they expire (typically some time between 18 months and 3 years depending on the program), I lose my premium and make no recuperation of my cost. However, if I do use my miles on a flight that costs more than the $75, I’ve “made” the difference between the retail cost of the flight and the cost of my miles, which could be a substantial profit if the retail price is $200–300. Obviously, this assumes I would have taken the flight anyway, but over time this is a reasonable assumption.

For airline miles, then, the batch of miles can be thought of as a call option, and the retail cost of a flight (which fluctuates drastically) can be thought as the stock.

Let’s relax the restriction that all flights cost the same amount of miles. After all, your miles can buy you a flight to Berlin or a first class ticket to Singapore. How does the call option analogy apply in the more general case? Because the miles costs are no longer fixed, we can’t think of miles in specific size batches, so we’re back to having a large number of options that each cost 0.6 cents.

What are they options for? In the original case, a single mile-option can be ‘called’ for 1/12500th of a domestic flight.  However, in the general case, it can also be redeemed for 1/30000th of a one-way flight to Europe, or 1/110000th of a first class flight to Singapore. In fact, our mile-options gives us the flexibility to buy different “stocks” depending on what we find most valuable! This is like buying a call option that can be redeemed for different stocks depending on what will make you the most money.

Although this is an improvement of airline miles over stock options, one shortcoming is that the miles are typically only redeemable in large, discrete amounts. This is where we get the problem of “orphan miles” — miles that are not enough to redeem for a full award and therefore, in stock option parlance, are unexercisable.

But now we’re starting to get into the weeds, and I was mostly interested in introducing a general way of thinking rather than coming up with a perfect metaphor. At this point, I should probably reiterate the wisdom (from The Points Guy, of all people) that you should not treat airline miles as an investment (i.e. income) strategy. Miles make a poor investment over the long term because of how quickly they lose to inflation (due to award chart devaluations), and they have no intrinsic value since they can’t be traded as real options can.

That said, thinking of airline miles as a type of investment instrument gives me a much more concrete way of working it into my budgeting and planning. In the face of the allure of flying first class everywhere I go or the prospect of free travel for the next decade of my life, it’s otherwise hard to decide when to stop earning miles. Would I buy $1,000 of a stock option for a single company? Maybe. $10,000? Probably not.

So what do you think? Does the stock option analogy make sense? Does it change how you think about your miles?