Polarity.finance
  • Introduction to Polarity Finance
  • ⛓️Omnichain integration
    • Cross-chain messaging
  • 📟Liquid Options Facility (LOF)
    • Liquid Options Facility
    • Option Pricing
    • Polarity Liquidity Pools
    • Tail Risk Exposure and Return Profile
    • Dynamic Index Operations
    • Rebalancing the LOF
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      • Borrowing Against Options
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  1. Liquid Options Facility (LOF)

Tail Risk Exposure and Return Profile

Tail Risk Exposure and Return Profile

PLP holders take on a position that bets against the occurrence of tail risks, which are infrequent but high-impact market movements. By definition, these tail events are rare occurrences, and PLP holders profit from their infrequency.

Consequently, the return profile of PLP holdings typically exhibits periods of stable positive returns, generated by the consistent earning of option premiums. However, these periods are punctuated by short, sharp losses when significant market movements trigger the exercise of the sold options, imposing losses on the liquidity pools and, by extension, the PLP holders.

This dynamic underscores the inherent trade-off between the potential for consistent premium income and the exposure to infrequent but substantial losses associated with tail risk events. PLP holders must carefully assess and manage this risk-reward balance within the context of their overall investment strategy and risk tolerance.

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Last updated 1 year ago

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