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Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors.
Before trading, please ensure that you fully understand the risks involved
Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors. Before trading, please ensure that you fully understand the risks involved
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Tuesday, November 16, 2021

Derivatives Idea - The Coming Age of Metaverse – Top Investment Plays

By Century Financial in Investment Insights

Derivatives Idea - The Coming Age of Metaverse...
Derivatives Idea - The Coming Age of Metaverse – Top Investment Plays

* Trading in financial market carries risk and can result in loss of capital.
* This performance is only observed with historical backtests and not traded by the company.

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The product and investment ideas do not consider the risk profile and financial position of the recipient and may not be suitable for everyone. Trading in financial markets and use of margin involves a significant risk of loss, which can exceed deposits. Please read the complete disclaimer carefully.

Risks & Assumptions

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The structure is based on options buying & selling strategy.
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Option prices and the corresponding pay-off are as of expiry & for representative purposes only. Going ahead, as the stock price moves in either direction, the final pay-off will change accordingly.
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The assumption of receipt of the initial coupon or the initial debit cost is based on the option premiums available at the time of structure creation. This may vary at the time of actual execution depending on the corresponding option prices and implied volatility.
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Numbers given below for the P & L are on a gross basis (without considering any transaction charges)

Rationale

The Coming Age of Metaverse - Top Investment Plays

Rationale The metaverse is a network of virtual environments in which many people interact with each other virtually using their digital avatars. Think of this as some kind of super enhancement of the popular Hollywood movie The Matrix. Originally a concept from popular science fiction novels and movies, the word metaverse is comprised of 2 important components - MetaVerse. Meta implies transcendent i.e beyond the average human experience and verse means universe. The concept was first popularized by Sci-fi Novelist Neal Stephenson in his 1992 novel "Snow Crash".
3 Key Aspects of Metaverse Experience Graph
Prominent Stocks Meta Platforms ($FB) - Facebook recently rebranded itself to the new name. After slowing down briefly in 2018, the year the Cambridge Analytica scandal erupted, Facebook has been steadily making large acquisitions — at least 21 in the last three years. Mark Zuckerberg's new move will likely propel the fate of the entire Metaverse industry. The move is seen as an attempt by Facebook to directly connect with its customers without having to rely on Apple and Google handsets. If successful, Facebook's influence will extend to entirely new types of culture & commerce.
Unity Softwares ($U) - The company already offers the leading platform for developing interactive 3D content. More than 70% of the top 1,000 mobile games in the world have been built using its platform. The company empowers a lot of individual and corporate content creators to build AR/VR & 3D apps. Unity's latest acquisition of Weta Digital is a very big deal for the markets. The move is likely to bolster Unity's toolset and talent for 3D content creation as it expands further in the Metaverse Universe. The company's share price has broken above its previous ATH of $175.
Roblox Corporation ($RBLX) - Roblox games are often known as meme games. The company has made one live service game with the company named behind this. Despite this, Roblox market cap now tops above the most valuable US gaming company Activision Blizzard. Roblox is trying to build a virtual world that rivals most of its competitors. The company also wants to provide tools for the community independent of its content creation.
Earnings & Investments Update on these stocks Facebook has announced its plan of spending at least $10 billion this year on Facebook Reality Labs, its Metaverse division tasked with creating AR and VR hardware, software & content. Unity beat its Q3 earnings and revenue expectations and also raised its full-year guidance. Roblox reported bookings of $637.8 million, up 28% year over year, compared with an estimated $636.5 million. Revenue excluding deferred revenue came in at $509.3 million, up 102% year over year. Roblox had more than 47.3 million average daily active users in the third quarter, up 31% year over year and up from 43.2 million in the second quarter.
Bloomberg Analyst Recommendations Buy Hold Sell
$FB 52 8 3
$U 12 3 1
$RBLX 10 2 1
Structure View Bullish with downside accumulation
Structure Design using Risk Reversal Strategy Lower Strike OTM Put Sell + Upside Bull Call Spread
Bullish View Capture - Using Risk Reversals The 3 Structures on $FB, $U, $RBLX are designed to provide the investor with an potential opportunity to go long on the stock at a discount on the targeted downside movements along with locking in the potential upside gains.
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$FB Line Chart (Last 3 Years | Bloomberg)

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$U Line Chart (Last 3 Years | Bloomberg)

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$RBLX Line Chart (Last 3 Years | Bloomberg)

Performance Stats

Metaverse Stocks Structure Performance Stats

Underlying Expiry Structure Price Range Considered Last Price Exposure Size Potential Coupon Received Potential Breakeven price Potential Average gains above break even Lower Put Strike Bull Call Spread Strike Potential Max Profit Potential Max Loss Effective Buying Price in Case of Potential Assignment
$FB March 2022 $150 - $600 $340 1 Lot = 100 Shares 1.91% Above $293.5 5% 88.24% 102.94%-107.35% $2,150.00 $(14,350.00) $288.75
$U February 2022 $100 - $300 $197 1 Lot = 100 Shares 2.23% Above $150.6 8.31% 78.68% 101.52%-106.6% $1,440.00 $(5,060.00) $147.50
$RBLX February 2022 $0 - $220 $108 1 Lot = 100 Shares 4.63% Above $85 9.26% 83.30% 101.85%-106.48% $1,000.00 $1,000.00 $83.50

Data & Prices as of: 12/11/2021 - US Markets Close | Bloomberg

Payoffs

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$FB 4-Month Strategy Payoff Profile (Source: Excel Calculations)

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$U 3-Month Strategy Payoff Profile (Source: Excel Calculations)

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$RBLX 3-Month Strategy Payoff Profile (Source: Excel Calculations)

Risks and Assumptions for Back-tested trading strategies
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The risks and assumptions listed here are not intended to be an exhaustive summary of all the risks and assumptions involved.
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The strategy might suffer from look-ahead bias which occurs due to the use of information or data in a study or simulation that would not have been known or available during the period being analyzed. This can lead to inaccurate results in the study or simulation.
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Future price movements may not be exactly the same as the historical price movements and this could lead to variation in performance.
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Testing can sometimes lead to over-optimization. This is a condition where performance results are tuned so high to the past they are no longer as accurate in the future.
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The model assumes no slippages in trading. Slippage refers to the difference between the expected price of a trade and the price at which the trade is actually executed.
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Drawdowns in actual trading can be higher than the tested system and losses could be significant in the event of leverage.
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Unforeseen events can lead to variation in performance from the tested trading strategy.
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The tested result has been computed with price feeds available from Bloomberg.
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The testing environment has not considered transaction or any other costs.
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Trading indicators used for the purpose of testing has been provided by Bloomberg.
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The strategy might suffer from data mining fallacy, selection bias and backfill bias.

Data Source: Bloomberg
Data as of: 12/11/2021

Arun Leslie John
Chief Market Analyst

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