How does stronghold work?
- Generally, a stronghold is a construction or building designed for defense.
This is the goal of stronghold - to defend of volatility in prices.
- stronghold pulls real world commodity prices and generates on-demand protective call options from a liquidity pool.
- Option buyers can hedge against volatility by buying options and paying a premium to the pool.
- Investors can make a stable yield by contributing liquidity to the pool.
- A minimum over-collateration is required to protect investors and option buyers against liquidity shortage and dry-outs,
i.e. higher premiums are paid depending on the degree of collateration.
How does a "cash-settlement protective call option" works?
- In general, a call option is an option to purchase a good at a fixed price in the future.
- "cash-settlement" means, at option exercise, you actually do not buy the good but get a cash payment of the delta of current market price and your fixed option price (strike).
- Thus, when the Underlying Price exceeds the strike, you receive cash at exercise day.
- "Protective" means, the seller is protected to not risk paying you extensively high money if market prices soar.
- Thus, when the market prices exceed a second strike price ("call strike")
the option buyer does no longer profit from rising prices.
- This mechanism creates a price corridor ("collar") within the market participants are hedged but also allows predictability of how much liquidity is needed in the pool.
