Welcome Sanics! We’re checking back into class at Cega School today, and we’re excited to unravel some new financial jargon with you. After our previous deep-dive into structured investments, we’re now setting our sights on Options, particularly their most powerful variant — Exotic Options. So let’s get started.
Cega School: A Quick Recap
What it is:
Cega School is an interactive three-part educational series. Released bi-weekly, each part features an informative article followed by a short quiz on the Galxe platform. By logging attendance in Galxe, participants unlock access to the subsequent part of the series. The journey with Cega School concludes on September 29th, 2023.
Your Incentive:
Graduates of Cega School stand a chance to win $500 USDC shared among winners as well as an exclusive NFT to commemorate their successful completion of the program. More details can be found here.
What Are Options
Options belong to the expansive family of derivatives. In essence, derivatives get their value from the price of something else. To grasp the concept of options, let’s visualize a simple scenario:
Imagine you’ve got your eye on a piece of land but aren’t quite ready to buy. Instead, you pay the owner a small fee to hold it for you at a fixed price for the next three months. If property prices shoot up during this period, you still get to buy it at the agreed price, making a potential gain. If not, you can decide not to buy, forfeiting only the small fee. This arrangement protects you from skyrocketing prices while offering the flexibility to back out.
In the world of finance, this is precisely what options offer — an agreement that grants the option owner the right, but not the obligation, to buy or sell an asset at a predetermined price up to a specific date. This ‘right’ comes at a cost, known as the option’s premium. Investors use options for various purposes: to hedge against potential price drops, generate additional income, or speculate on market movements. Think of them as flexible financial tools, letting you capitalize on market opportunities while limiting potential losses to the premium paid. Simply put, options give you options!
How Do Options Work
Fundamentally, there are two primary options to consider: ‘Calls’ and ‘Puts’. A call option gives the investor the right to buy an asset at a predetermined price (the strike price) and date (the expiry date), beneficial when expecting the asset’s price to rise. A put option allows the investor to sell, which is advantageous when expecting the asset’s price to fall. Investors use options either to hedge, protecting themselves from potential adverse price movements, or to speculate, hoping to profit from future price changes.
When you hear about the price of an option, you’re hearing about its ‘premium’. The price of this premium is based on the probability of future price events happening. Quite simply, the more likely something is to occur, the more expensive an option premium will be. These premiums are based on an option’s intrinsic value & extrinsic value (or time value). Let’s break them down.
Intrinsic value is like immediate profit — it’s the difference between the current asset price and the option’s set price (or strike price). Extrinsic value, on the other hand, considers variables like how much time remains before the option expires, and how volatile the assets or market conditions are. For example, more time left on the option typically results in higher premiums because the option buyer gains value from being able to wait longer. Greater volatility in the underlying assets typically leads to higher premiums because the option buyer has a higher likelihood of seeing the option in the money.
Simplifying Exotic Options
Exotic options aren’t about diving into complexity; they’re about embracing customization. Think of vanilla options as your basic coffee order: a flat white or cappuccino. Exotic options are like customizing that coffee order with your preferred milk type or amount of sugars. It’s still coffee, but tailored exactly to your taste.
Rather than sticking to fixed terms, payment structures, and strike prices, they provide the flexibility to be molded to your unique financial goals and risk appetite. Because of this, exotic options benefit a wide range of investors.
Benefits of Exotic Options
The customization exotic options bring to the table unlocks a myriad of possibilities for investors. These strategies bring better risk control, the possibility of earning in unconventional market scenarios, and a wider array of strategic possibilities such as multiplied gains in favorable scenarios.
For example, you may be bullish on the overall crypto market but very wary of its harsh volatility and have a low risk tolerance. Because of this, you’re looking for an investment that allows for growth and upside potential, but has strong built-in protection against sudden downturns in the market. Enter exotic options, tailored to fit the specific needs of an investor. Cega’s ‘Cruise Control’ strategy exemplifies this, offering 90% price-drop protection to safeguard you from market downswings whilst generating a steady yield through options premiums to satisfy your growth needs.
Understanding the Risks
While options offer strategic financial opportunities, they come with risks to be aware of.
- Potential Loss for Buyers:
When you purchase an option, the maximum you risk is the premium you’ve paid. If the market doesn’t swing in your favor by the time of expiration, this initial investment is what you stand to lose. - Sellers’ Exposure:
Selling options brings the advantage of earning premiums, but also the exposure to negative market movements. However, exotic options can be structured to limit this downside. Features like knock-in barriers offer a level of protection. With a knock-in barrier, the option isn’t activated unless the asset price reaches a specific threshold. This can serve as a cushion against drastic market movements. - Asset Dynamics:
Some options, especially those involving multiple assets like basket options, are influenced not just by the volatility of individual assets, but by their inter-relationships. Understanding how assets move in tandem becomes crucial. Exotic options can be tailored to capture benefits from these correlations, turning a potential risk into an opportunity.
Every financial product requires a balance of risk and reward, and the world of options is no exception. With the nuanced features of exotic options, strategies are crafted to align with specific risk appetites and market perspectives. However, as always, understanding these nuances is key to leveraging the full power of options.
Cega Strategies
At the heart of Cega’s vault strategies are exotic options. These strategies collect option premiums and harness a variety of unique features to safeguard investments and enhance yields. The real brilliance of Cega lies in how we seamlessly integrate these exotic option strategies into user-friendly structured investments, tailored to match distinct risk-reward profiles. This ensures that our users directly benefit from the high yields and robust capital protection that strategic exotic options can offer.
Discover the Cega strategy that aligns with your goals on app.cega.fi and embark on a simplified investment journey!
Confirming Your Attendance at Cega School
To complete this session of Cega School:
- Submit your Attendance: Complete the quiz in the Cega School Galxe Campaign to officially mark your attendance with an OAT reward.
That’s it! Your steps towards becoming a Cega School graduate are well underway.
Next Steps
Good work on finishing this part of Cega School! You now have a solid understanding of options and their place in finance. Next time, we’ll explore the unique exotic option strategies Cega utilizes.
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