How Risk/Rewards are created by algorithm ?
The risk/reward calculations for makerz NFTs are done using advanced financial modeling and algorithms. Here's an overview of the process:
AI Algorithms: makerz NFTs use AI algorithms to analyze market conditions, historical data, and option pricing models. These algorithms take into account various factors such as volatility, price movements, and market trends to assess the potential risk and reward of each NFT.
Options Strategies: Each makerz NFT is backed by specific options strategies (such as Call Spreads, Put Spreads, Iron Condors, etc.). These strategies define the conditions under which the NFT will pay out rewards. For instance, a Call Spread might pay out if the underlying cryptocurrency's price exceeds a certain threshold.
Market Expectations: The AI algorithms consider basic market expectations for each underlying asset, typically ±10%, ±20%, and ±30% movements. This helps in setting realistic price targets and conditions for the NFTs.
Risk/Reward Ratios: The Risk/Reward (RR) ratio for each NFT is calculated by comparing the potential reward to the amount of risk taken. This ratio reflects the probability of the strategy being successful. A higher RR ratio indicates a more favorable potential outcome relative to the risk.
Price Analysis: The algorithms analyze the prices and costs of At-The-Money (ATM), Out-Of-The-Money (OTM), and In-The-Money (ITM) options to create a balanced risk/reward profile. This analysis helps in setting the optimal pricing for the NFT and its potential payouts.
Continuous Monitoring: Once the NFTs are created, their underlying strategies are managed 24/7 by options trading specialists. This ensures that the risk/reward profiles remain aligned with market conditions and that the NFTs remain attractive to investors.
Example
Let’s say you purchase a makerz NFT backed by a Call Spread strategy on Ethereum (ETH). Here’s how the risk/reward might be calculated:
Current PriceAsset: Ethereum (ETH)
Current Price: $3,800
CLAIM: $4,000
Expiry Date: 30 days from today
Potential Reward: If ETH price is above $4,000 at expiry, the NFT pays out a reward.
The AI algorithm would analyze historical price data, market volatility, and the current trend to estimate the probability of ETH reaching the target range within the given timeframe. It would then set a risk/reward ratio that reflects these calculations, ensuring that the NFT is priced to offer a balanced potential return for the risk taken by the buyer.
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