Tag: Insurance

Insurance is a means of protecting against the risk of financial loss. 

When it comes to financial markets, products exist to reduce risk or capitalize on opinions at low cost. One such product is an option, a derivative that acts like an insurance contract. 

Options are the right to buy or sell an asset at a later date and agreed upon price. 

Option buyers purchase put and call options to increase return or insure against loss.

If the option buyer were short stock, he or she would buy a call to hedge upside exposure. 

If the option buyer were long stock, he or she would buy a put to hedge downside exposure. 

The counterparty in this transaction writes options in exchange for a premium derived from factors such as the spot and strike price, time to maturity, volatility, and interest rate. 

Option buyers pay sellers to cover their losses past a certain level and time.

Nothing is free. When it comes to selling options, similar to insurance, returns are obtained through the calculation of expected probabilities and the writing of overpriced contracts. A key input in pricing formulas is volatility, the magnitude of potential change. 

Volatility, a derivative of fear, compels option demand. 

When the demand for an option rises, volatility and option premia rise with it. Demand for an option does not necessarily mean an underlying security will move. It just means that fear has compelled a market to increase its demand for protection.

As is true for most other aspects of life, fear is blown out of proportion, and hence, this is what happens in the derivatives market: fear overstates the magnitude of potential change.

So, when purchasing protection, one must be correct in their assumption on direction, time, and volatility to make money on an option. When selling, one must hedge against the risks associated with direction and volatility, among other things.

An option seller must not necessarily be directional to make money. Instead, they can leverage the dynamics of time and volatility to gain statistically measurable exposure in products traded.

In light of these market dynamics, Physik Invest derives its core edge from trading ratioed, multi-leg strategies that combine short and long positions to reduce risk and increase returns. Though direction is often a factor in positions netting a positive return, holistic market structure analysis is a requisite for entry.

About Physik Invest

The business was founded in 2020 by Renato Leonard Capelj as a place for the self-directed trader to share his methods, research, and performance. Since then, the company has evolved and may soon offer research, consulting, trading, and asset management solutions, pending the creation of a proper business structure to support such an effort.

As a disclaimer, Physik Invest and Capelj are not in the business of providing advice; their comments should not be construed as recommendations. Derivatives do carry a substantial risk of loss.

At this time, Capelj and Physik Invest are non-professional advisors. They won’t solicit the public for capital or collect fees and disbursements.