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A good case in point is small biotech companies focused on research. Technically traded on the capital markets as common stocks (and if there are enough adults
by H8crilA 6y ago
A good case in point is small biotech companies focused on research.
Technically traded on the capital markets as common stocks (and if there are enough adults in the room - without debt), but in reality the securities of such companies behave exactly like very convex options - whatever drugs the company is currently working on will either work or not. If it clicks, great, you get FDA approval and the stock is suddenly worth 5x or maybe even 50x more on the basis of patent royalties or outright drug sales. If not, the failed research operation is either recapitalized by patient investors or decomposed by liquidators, while the "real world resources" (researchers and equipment) find a new thing to do.
- conformist 6y agoYeah, nice example. I guess, the interesting aspect in that case is more that the option is way out of the money and almost binary, not so much its Gamma? Like, you still need to have some kind of idea about probabilities of outcomes to see whether the option is not crazy overpriced? This is similar to the "lottery ticket" critique addressed in the end ... you wouldn't just invest in any biotech firm?
- HarryHirsch 6y agoDispersing the operation if things didn't pan out is actually the wrong approach and probably partly to blame for the poor results in Pharma these days. If you disband a research operation you lose all informal knowledge, and if you sell off assets separately you have to reassemble the instrument park again to start another company. In the past, when there were industrial research labs, the scientists and equipmetn would stay and be reassigned to another project.