In the most basic sense optionality means non-linear. By nature we think linearly, but our [[Jensen's Inequality|experiences are not linear]]. [[Thinking Fast and Slow|Our minds struggle to fully comprehend exponential phenomenon]]. Derivatives such as call and put options provide the most obvious source of optionality in the domain of investing, but other, less obvious, sources of optionality exist. Cash is a major source of optionality that most investors don’t appreciate. Think of cash as a put option on every investment in the world. If it goes down and you want to buy it, holding cash enables you to do so. This is known as opportunity cost and cash gives you the flexibility to be able to choose any opportunity that comes your way. [[Liquidity]] and optionality are closely linked in this way. Positive optionality(aka convexity or gamma) comes with a cost whether explicit or not. Likewise, you should be paid for having fewer options (aka negative convexity or gamma) or selling options to others. This is why banks pay interest on the money you deposit with them and it’s why you have to pay for insurance. This is the very foundation of financial theory which is also known as the time value of money(TVOM). TVOM, however, is incomplete because it does not account for the value that cheap investment opportunities can provide. Most financial theory is a single-state concept: all opportunities are known at the time and we value money and investments via the discounting mechanism of TVOM. This is purely linear thinking. **Case Studies** - [CHG Issue #113: Counterfactuals](https://open.substack.com/pub/cedarshillgroup/p/chg-issue-113-counterfactuals) Explore Further: [[Decision-Making]] | [[Time Value of Money]] Tags: #evergreen Your support for Cedars Hill Group is greatly appreciated <form action="https://www.paypal.com/donate" method="post" target="_top"> <input type="hidden" name="hosted_button_id" value="74PGN8ZXHQVHS" /> <input type="image" src="https://www.paypalobjects.com/en_US/i/btn/btn_donate_LG.gif" border="0" name="submit" title="PayPal - The safer, easier way to pay online!" alt="Donate with PayPal button" /> <img alt="" border="0" src="https://www.paypal.com/en_US/i/scr/pixel.gif" width="1" height="1" /> </form>