User Rationale

Institutional desks require exposure that traditional equity & options markets cannot isolate or hedge.

A binary catalyst is the most identifiable repricing event a biotech-focused desk can face. The resolution date is marked, the outcome resolves to {0, 1} – pass / fail, and the size of the stock's delta is relatively estimable in advance. Yet there is no instrument that isolates an individual catalyst event.

The equity market bundles the readout with various extraneous factors – sector beta, rates, the remainder of the company's pipeline, management risk, and financing risk. A view on a single Phase 3 result arrives, at best, as a small share of the variance in the position you have to buy to express it. Listed options, where they exist on a small- or mid-cap name, are extremely illiquid and wide. They're priced off a volatility surface that fundamentally cannot define a stepwise price jump at a known date, since vol-theory is largely based on continuous repricing.

This document is meant to address who this insufficiency harms the most, why the two existing financial products fail, and what our venue could allow them to do.

Taking Exposure: The first major constituency is the institutional desk / biotech fund with a research edge on a specific catalyst (including a read on the fundamental biology of an asset, regulatory posture, or the base rate for a trial of a certain design in a certain modality/TA). Presently, that variant view can only be expressed in two ways: either buy the equity and accept everything bundled into it, or construct an options position that is likely illiquid and approximate. Either way, the desk's view is diluted. To size a position to the catalyst is to mis-size it to everything else the stock is exposed to; to size it to the stock is to under-express the view a desk has. What traders want is the jump – clean, sized to conviction, without carrying underlying exposure. This is where a venue on the event itself would be valuable: either take the anchor exposure directly, or position the magnitude of the price revision at the readout – long the jump, short the drift – without touching the equity.

Hedging Exposure: Conversely, a large portion of catalyst risk is embedded, unwanted, and – until now – unhedgeable.

Generalist or crossover funds hold biotech positions for reasons uncorrelated to an individual binary – i.e., a valuation thesis, index weight, or longer pipeline narrative – but could be long a readout they don't prefer to be exposed to. These institutions could buy the NO leg on the catalyst to neutralize their exposure to the binary while keeping their fundamental long position in play.

Specialist biotech funds running larger books of, say, 20 names could, in aggregate, be long a calendar of readouts they did not construct as a portfolio. Their true risk is the cluster of correlated binaries landing in a single quarter. These funds could lay off the specific catalysts they have no edge on and keep only the ones they want to be exposed to.

Milestone or royalty holders (i.e., pharma partners, royalty funds, licensors, etc.) have payouts that switch on single approvals. These are naked binaries with no equity to short against, since the holder often owns no stock at all. A bespoke binary contract would allow these parties to hedge the milestone directly.

Credit desks holding a company's note have covenant or refinancing exposure that hinges on the readouts. Credit default protection on a single small-cap issuer is expensive or non-existent; a position on the underlying catalyst is a cheaper proxy for the single event that moves the credit.

None of the counterparties mentioned here are speculating on the readout itself. They're already exposed to such readouts and have no way to size their exposure down. A contract on the event itself allows each of them to shed individual catalysts.

Thin Options Markets: Very few listed biotechs have the market cap / liquidity to operate efficient (low-spread) options markets. Market makers and options traders we've spoken with describe event contracts as too thin to work an institutional order through, and even if the quotes are created, there's usually not enough depth.