How Can the Risk of a Cease and Desist Order Be Priced into a Token’s Option Premium?
The risk of a cease and desist order is priced into the option premium through an increase in the implied volatility. Traders perceive the regulatory risk as a 'tail risk' event ⎊ a low-probability, high-impact event that could cause a massive, sudden drop in the token price.
This risk is factored into the option's volatility input, making both call and put options more expensive to reflect the possibility of a catastrophic price movement.
Glossar
Cease and Desist
Action ⎊ A formal directive issued by a regulatory body, often the SEC or a state authority, demanding the immediate cessation of specified activities.
Put Options
Premium ⎊ Put options, within cryptocurrency markets, represent a contractual obligation assumed by a seller to fulfill a buyer’s right to sell an underlying asset at a predetermined price on or before a specified date, functioning as a protective mechanism against downward price volatility.
Volatility
Measurement ⎊ Volatility, in quantitative finance, is the statistical measurement of the dispersion of returns for a given financial asset, typically quantified by the annualized standard deviation of its price movements.
Cease and Desist Order
Enforcement ⎊ A Cease and Desist Order, within cryptocurrency, options trading, and financial derivatives, represents a legal instrument issued by a regulatory body ⎊ such as the SEC or CFTC ⎊ directing a party to halt specific actions deemed to violate established financial regulations.
Option Premium
Cost ⎊ The Option Premium represents the initial cost paid by the buyer to acquire the right conveyed by the contract, functioning as the price for risk transfer.
Regulatory Risk
Framework ⎊ The evolving regulatory landscape surrounding cryptocurrency, options trading, and financial derivatives presents a complex and dynamic risk profile.