1. Structured Product Overview
Structured products generally refer to financial instruments whose performance is linked to underlying assets, products or indexes. They are usually combined with underlying financial instruments and financial derivatives to meet asset allocation needs. The objects linked to structured products are generally risky assets and need to bear market risks. Return risks arising from volatility.
Generally speaking, the terms of structured products are relatively flexible, and different linked targets, terms, risk returns can be designed according to the individual needs of investors. In addition, for investors, it may be relatively flexible in terms of compliance and accounting treatment.
Structured products = underlying assets + derivatives
Basic financial assets: bonds, indices, stocks, foreign exchange, etc.
Derivatives: futures, options, swaps, etc.
Common structured products include snowballs, shark fins, airbags, etc. Most of them require the use of options, and even non-standardized exotic options, such as barrier options, binary options, etc.
2. Basics of options
(1) Classification
Options are divided into standardized, on-exchange traded vanilla options (Vanilla Options) and non-standardized, over-the-counter exotic options (Exotic Options).
Vanilla options:
Options usually refer to vanilla options, that is, traditional options, which are divided into European options with a fixed exercise date and American options without a fixed exercise date.
Options are the right to buy or sell an underlying futures contract at a specific price before or on a certain date in the future. Therefore, there are two directions: call and put.
Option value is composed of intrinsic value + time value.
For a call option, the investor pays a premium C and has the right to buy the underlying S at the exercise price K on the expiration date T. Intrinsic value is expressed as:
For Put Option, the investor pays the premium P and enjoys the right to sell the underlying S at the exercise price K on the expiration date T. Intrinsic value is expressed as:
Based on the execution price of options and the current price of the underlying asset, options are divided into at-the-money, out-of-the-money, and in-the-money options.
There are two directions in the transaction: long and short. Someone buys and someone sells. Corresponding to the investor who buys the option, the seller receives the premium and assumes the counterparty obligation as the option holder to buy and sell the subject matter.
Based on different views on future underlying market trends, there are the following basic strategies:
Bullish: long call
Bearish: long put
Not bullish: short call
Not bearish: short put
The profit or loss on the call option is:
The profit or loss on the put option is:
expand:
Options are widely used. In addition to being the basic elements of many products, options also provide an idea and pricing model for decision-making in uncertain environments to facilitate pricing. For example:
1) The essence of insurance is a put option. For example, critical illness insurance can be regarded as a put option on one’s own health.
2) Real option, a way of corporate strategic decision-making, uses option models to price project decisions
3) In corporate valuation (Merton model), the company's assets will also be split into liabilities + equity. Taking creditors as an example, there are two ways of thinking:
Buy the company from shareholders with debt as consideration, sell a call option (short call) at the same time, and receive a fixed income (option fee C). At maturity, if asset S > liability K, the creditor will receive a payment limited to the principal of the debt. (Exercise price K) funds to sell all the company's assets S to shareholders. Therefore, for shareholders, it is equivalent to buying a call option; for creditors, the value of their claims is the company value S - call option C.
At the same time, according to the option parity formula, bond value = S-C = K-P, which can also be understood as a creditor (holding corporate bonds). In essence, it sells a put option (short put), collects the option premium, and at the same time buys it at a risk-free interest rate. into bonds. At expiration, if the company becomes insolvent and liquidated, that is, the put options held by shareholders are exercised, creditors are essentially forced to buy the company's remaining assets at the exercise price; if the company survives, shareholders will not exercise their rights and creditors will get back The risk-free return is K and the option premium is earned.
(2) Strategy combination
Based on long, short, call, and put options, options can be combined to create a variety of different profit and loss situations to fit the forecast view of the future market without predicting specific rises and falls. They are highly combinable, such as predicting market fluctuations and unpredictable changes. Fluctuations, range fluctuations, time fluctuations, etc.
Here are some basic options portfolio strategies:
Straddles: long call + long put or short call + short put, essentially long or short volatility.
Strangle: Same as the straddle, only the strike prices of the options used are different.
Butterfly: short call (flat value) * 2 + long call (real value) + long call (virtual value); it is equivalent to a straddle with insurance to avoid the situation of limited returns and unlimited risks.
Bull Spread: long call (lower exercise price) + short call (higher exercise price), which is equivalent to bullish call, but the increase is limited, and the maximum increase will not exceed the higher exercise price. The bear spread is the opposite, that is, short call (lower exercise price) + long call (higher exercise price).
The above are some strategies for basic option combinations. They can also be combined with underlying assets to form strategies, such as:
Covered Call: long spot + short call, the profit and loss is the same as put selling, but the essence is different.
Protective put: long spot + long put, which provides protection for spot positions. It has the same profit and loss as long call, but is essentially different.
3. Structured products on sale on exchanges and asset management platforms
Binance
Only dual currency (online relatively early)
https://www.binance.com/zh-CN/dual-investment
OK
Dual Coin & Shark Fin (newly launched this year)
https://www.okx.com/earn/shark-fin?from=home
Bybit
Currently there are only dual coins, Shark Fin has been offline.
https://learn.bybit.com/zh-tw/bybit-shark-fin/crypto-structured-products/
Bitget
Only dual currency (newly launched this year)
https://www.bitget.com/zh-TW/dual-investment
KC
Currently there are only dual currencies, Kucoin Wealth (not online, expected in March) provides structured products and options
https://www.kucoin.com/zh-hant/wealth/landing?spm=kcWeb.B1homepage.Header6.4
Matrixport
The products of the asset management platform are much richer than those of the exchange, including dual currency, trend smart profit (spread strategy), shark fin, range hunter, etc.
https://www.matrixport.com/zh/invest-crypto-with-dual-currency
Paypal
Rich product types
MetAlpha
https://www.metalpha.finance/zh/
Ribbon Finance（DeFi）
Paradigm led the investment, with a TVL of 42.5m, and its products include covered call (covered call), put selling, twin win strategy (two-way shark fin), etc.
Obtain liquidity from Hegic and Opyn, the options protocols on Ethereum at the same time. Their product architecture deserves in-depth study
https://www.ribbon.finance/
4. Product cases and disassembly
(1) Dual currency
The most common products currently on the market include two directions: buy low and sell high. They are essentially the Covered Call and Put Selling strategies mentioned above, with a simple structure.
The core issue is how the exchange matches buyers and sellers of options and whether the liquidity is sufficient; if the exchange itself serves as the user's counterparty, risk hedging needs to be considered.
Exchanges generally use interest and annualized rate of return to express product returns, with the intention of reducing users' risk vigilance and promoting sales. The annualized rate of return should be calculated backwards using option fees.
The income of exchanges from products is not transparent. When the time, spot price, execution price, and expiry date are the same among different exchanges, there are differences in income. User option fees may be deducted as handling fees, but they are packaged as no handling fees. .
(2) Shark fin
It is rare on exchanges (I only see OKX selling it), but common on asset management platforms. It has two directions: bullish and bearish, and is divided into one-way and two-way.
The picture above shows a bullish shark fin. This product can be understood as: buying a fixed income product + buying a call barrier option, long bond + long up-and-out call options.
Generally speaking, in order to attract investors, shark fin products will include a certain amount of knock-out income (Rebate), so that investors will not get nothing.
The same goes for bearish shark fins, just replace call with put.
Correspondingly, the two-way shark fin has two strike prices upward and downward. Compared with the one-way shark fin, it has one more potential income: buying a fixed income + buying a call barrier option + buying a put barrier option Options, long bond + long up-and-out call options + long down-and-out put options.
The premium of barrier options under the same conditions is lower than that of vanilla options (because barrier options give up the possibility of upper-end returns), so on the basis of fixed income, customers can be given capital-guaranteed income (interest income minus option fees).
Hedging of barrier options is relatively complex. Some products may also set an observation period. Due to the existence of the knock-out price, the delta of the option will fluctuate significantly when approaching, making dynamic hedging relatively difficult.
Another hedging idea is static hedging, which involves combining a series of vanilla options on the market at the beginning of the period to create a portfolio with the same cash flow status. Taking the option buyer as an example, a call barrier option with a strike price of 100 and a strike price of 120 has a value of 0 when the underlying price is higher than 120. In other cases, it is equivalent to an ordinary call option, so:
1) The only situation we need to deal with is when the underlying price is higher than 120
2) Buy a plain call option with a strike price of 100
3) Short multiple call options with different shares and different expiration dates, but with exercise prices at 120
4) Finally, a portfolio of long call option + N * short call option is formed, constructing a cash flow equivalent to the barrier option
(3) Airbag
This product is not available on the exchange and is only available on some asset management platforms. By giving up part of the potential rise, in exchange for protection from the price drop of the underlying asset, there is a drop-in price (safety cushion) for this protection. No losses will be borne within the scope of the safety cushion, but losses will still be borne after the piercing, and the amount of loss is equal to the amount at the beginning of the period. Buy spot.
Its essential structure is: buy an at-the-money call option and sell a knock-down put option at the same time. That is, when the knock-in does not occur, the put option does not take effect, and the option premium income sold offsets the cost of the long call; knock-in When this occurs, the put option takes effect, triggering exercise and forcing the buyer to buy the corresponding underlying asset at the execution price.
Since the price of ordinary options is higher than that of barrier options, if the net option premium at the beginning of the period needs to be guaranteed to be 0, the option premium of long call needs to match that of short put, so the income when it rises is lower than holding the spot; its income curve does not reach the knock-in price When, it is basically the same as long call.
It should be noted here that the rising participation rate of the product (i.e. options fees + handling fees and other costs) cannot be too low, otherwise it will be significantly disadvantageous for investors. At this time, investors paid an exorbitant cost in exchange for a moderate level of protection. When the long-tail risks that really need protection occur, the protection is ineffective and investors bear all losses. Often this situation is missed in the scenario analysis of product descriptions.
5. Risk factors and hedging
The core of hedging lies in the risk factor, which is to hedge out the risks we do not want to take and retain the risks (returns) we want to take.
Risk factors for options—Greek letters:
（1）Delta
When the price of the underlying asset changes by 1 unit, the degree of change in the option price
A call option is positive and a put option is negative
When holding an option position, the operation of increasing and decreasing the corresponding share of the underlying asset to make Delta 0 is called a delta-neutral strategy.
（2）Gamma
Refers to the derivative of delta, that is, if the underlying asset price changes by 1 unit, the degree of change in option delta is similar to the concepts of delta change rate and acceleration.
Gamma is positive for both call and put options; for deeply in-the-money and deeply out-of-the-money options, Gamma is close to zero when the expiration date approaches.
When Gamma is high, simply hedging delta is insufficient (there will be errors), and other options need to be used to hedge gamma to construct a delta-gamma neutral hedging.
（3）Theta
Indicates the rate at which an option's value is lost relative to time as the expiration date approaches.
Whether bullish or bearish, Theta is negative.
One of the benefits earned by the option seller.
（4）Vega
The sensitivity of option prices to the volatility of the underlying asset. Vega is positive whether bullish or bearish.
The Vega of at-the-money options is the largest, and the deep real value and deep out-of-the-money options are close to 0.
（5）Rho
The sensitivity of option prices to the risk-free interest rate has little short-term impact.
about Us
JZL Capital is a professional institution registered overseas that focuses on blockchain ecological research and investment. The founder has rich experience in the industry. He has served as CEO and executive director of many overseas listed companies, and has led and participated in eToro's global investment. Team members come from top universities such as the University of Chicago, Columbia University, Washington University, Carnegie Mellon University, University of Illinois at Urbana-Champaign, and Nanyang Technological University, and have served at Morgan Stanley, Barclays, Ernst & Young, KPMG, and HNA Group , Bank of America and other internationally renowned companies.
