Innovation
PAYG (Pay-As-You-Go) Options
Traditional Model
Traditionally, In a European option where the option holder cannot exercise their option prematurely before expiry, the option holder typically pays an option premium at t=0 and waits until maturity to determine whether it is in-the-money (ITM) or out-of-the-money (OTM).
In the event the option is ITM, the option holder exercises the option and profits an amount = the difference between the spot price and strike price. If the option is OTM, the user gets nothing in return.
Cash per period
-10
0
0
0
0
0
0
0
0
0
0
Traditional Payoff if OTM
-10
-10
-10
-10
-10
-10
-10
-10
-10
-10
-10
Traditional Payoff if ITM
-10
-10
-10
-10
-10
-10
-10
-10
-10
-10
+20
Because the option holder has to fork out the entire option premium at the start of the option lifecycle, capital is locked up, and the holder has to unwind the position in the market manually. If the market swings in a wildly unfavourable direction to the option holder’s view, the option holder will find that the value of unwinding the option would be close to 0, as the intrinsic value is 0 and the time value is close to 0. In the illustration above, the option holder is stuck with a sunk cost of -10, the option premium.
As you can see, the traditional model can be quite restrictive as you must pay the full premium up front, and are locked in until the end of the option lifecycle.
PAYG (Pay-As-You-Go) Model
In the PAYG model, the option holder can hedge his risk of buying an option by paying for the option in instalments, aka Buy Now, Pay Later (BNPL) options.
Compared to the traditional model of option sales, the option holder can observe the market. If the option goes deeply OTM, the holder can stop paying for the option if he believes that the market will continue to trend unfavourably until maturity. In the model below, the user achieves a lower loss up to t=7 than the traditional model.
We believe this new model allows more flexibility for users and allows first time investors a safer, lower risk approach to options trading, that’s set to pay out more consistent returns over time.
Cash Flow per period
-1.2
-1.2
-1.2
-1.2
-1.2
-1.2
-1.2
-1.2
-1.2
-1.2
-1.2
BNPL Payoff if OTM
-1.2
-2.4
-3.6
-4.8
-6
-7.2
-8.4
-9.6
-10.8
-12
-12
BNPL Payoff if ITM
-1.2
-2.4
-3.6
-4.8
-6
-7.2
-8.4
-9.6
-10.8
-12
+18
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