Hunting For Optionality

Watching the Algerian footballers string together pass after pass in the final ten minutes of regular time, one word shot into my head: optionality.

No, I had not slipped into a sleep-deprivation delirium because the match had started at 4 a.m. I watched the recording the next day, without knowing the result. I know almost nothing about football and only watch an international match every few years.

The score was 2:2, and both teams would have been perfectly happy with that result, since it would have taken them through to the next round. But every player will put the ball in the net when the chance presents itself. And that was exactly what was going through my mind.

Everything was happening in Austria’s half, while the Algerians calmly passed the ball back and forth. In doing so, our team gave them a call option that was far out of the money. You pay a small premium for a small probability of success. The Algerians applied a little more pressure and paid that premium by shifting the game into the opponent’s half.

Nothing happens, until it does

The Austrians were short the call. They sold it by using a little less energy. In return, they received a premium in the form of time, which was working in their favor. In this situation, every sudden burst of movement, or volatility in financial language, is good for the option buyer and bad for the seller.

And sure enough, after what felt like 100 passes, a gap suddenly opened. Algeria used it, and just like that it was 3:2. The call had paid off for Algeria, and Austria paid dearly. The fact that we saved our skin in the final second does not change what happened before. For those of us watching, it was drama at its finest.

Payoff profiles in everyday life

As one of the founding market makers of the Austrian Options and Futures Exchange, ÖTOB, the habit of thinking in long and short calls and puts has been burned into my brain for the rest of my life. I see these payoff profiles not only in financial matters, but almost everywhere else in life as well. Even when the comparison is not entirely appropriate, and the options experts are already raising a warning finger.
One thing, at least, has become part of my DNA: I always want to be long the option. In other words, I want to benefit when the unexpected event occurs.

It is surprisingly useful, before making almost any decision in life, to pause for a moment and ask whether you are buying or selling optionality, and which payoff profile you are accepting as a result.