Intro to Crypto Options and Structured Products
Crypto options work like options anywhere: the right without the obligation, priced on volatility. The market around them differs in ways worth knowing.
How the market differs
Concentration. Liquidity is far more concentrated than in equity options, with a small number of venues, Deribit foremost, handling the majority of BTC and ETH volume. Coinbase's acquisition of Deribit in a $2.9bn deal signalled institutional interest in the segment.
Inverse contracts. Many crypto options settle in the underlying rather than in dollars, which makes the payoff non-linear in dollar terms even for a linear-looking position. This trips people up, and it means dollar delta differs from coin delta.
Volatility levels. Implied volatilities of 50% to 100%+ are ordinary, against 15% to 25% in equity indices. Everything scales accordingly: premiums are large, and theta is punishing.
A different skew. Equity indices show a persistent put skew, since investors are structurally long and buy protection. Crypto has often shown a call skew instead, because participants buy upside exposure. That reversal is a genuine structural difference in who holds the asset and what they fear.
Crypto's skew has frequently favoured calls rather than puts, which is the opposite of equity indices. The shape of a skew tells you what the market's participants are positioned for and what they are hedging.
Structured products, decoded
Retail platforms market products with attractive names and yields. Nearly all are options positions in a wrapper, and recognising the underlying structure is the whole skill.
Dual investment. "Earn 30% APY, and if the price rises above X you receive your return in the other asset." This is a covered call: you have sold the upside above X and been paid a premium. Fine if you understand it, and frequently marketed as a yield product rather than as the option sale it is.
Knock-out or barrier products. High yield until a barrier is breached, at which point the position terminates. This is a short barrier option, and the high yield is compensation for a risk that materialises suddenly.
Principal-protected notes. A zero-coupon bond plus a call. Safe-sounding, and the cost of the protection is most of the upside.
The general pattern
Structured products pay an attractive headline yield in exchange for a payoff you have sold. The yield is the option premium, and the risk is whatever the option covers.
This is the same sold-insurance shape found in carry trades and in liquidity provision: steady income, occasional sharp loss, no free money.
When offered a structured product, decompose it into vanilla pieces before evaluating the yield. If you cannot say which option you have sold, you should not be selling it, and the marketing material will not tell you.