Zero Day Options Are A Gambler’s Dream
Stay far away if you value your financial health
Human beings love to gamble and bet. That love turned a desert into a sprawling mass of wealth and debauchery (Las Vegas). Sports like boxing and basketball wouldn’t be as popular as they are without the ability to wager on the outcomes. And the desire for massive volatility, a.k.a. the ability make or lose a fortune in the blink of an eye, was part of what made crypto such an attractive asset class to so many.
Since financial markets became mainstream, the institutions behind their development (brokerages, exchanges, and investment banks) have operated with a simple truth — the more optionality and volatility you can embed into a product, the better it will sell.
This conflicts with the traditional academic view which says that all other things equal, investors will always prefer the security that offers less risk.
Sounds logical, but there’s a few things that academics are overlooking. First, it’s really hard to know when are all other things are equal or even somewhat close to being equal. Future expected returns are notoriously hard to estimate and without accurate estimates of returns, risk-return analysis becomes garbage in garbage out.
