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1. Overview of Structured Products
Structured products generally refer to financial instruments whose performance is linked to underlying assets, products or indexes. Usually, basic financial instruments and financial derivatives are combined to meet asset allocation needs. The targets linked to structured products are generally risky assets, which need to bear market Risk to earnings due to volatility.
Generally speaking, the terms of structured products are relatively flexible, and different linked targets, terms, and 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 = basic assets + derivativesUnderlying financial assets:
Bonds, indices, stocks, foreign exchange, etc.Derivatives:
Common structured products include snowballs, shark fins, airbags, etc. Most of them require the use of options, and even non-standard exotic options, such as barrier options and binary options.
2. Options Basics
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(1) classification
Options are divided into standardized, 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.
An option is the right to buy or sell the underlying futures contract at a specific price before or on a certain date in the future, so there are two directions: call call and put put.
Option value consists of intrinsic value + time value.
Call Option Call Option
The investor pays the premium C and enjoys the right to buy the target S at the strike price K on the maturity date T. Intrinsic value is expressed as:
Put Option
The investor pays the premium P and enjoys the right to sell the subject matter S at the strike price K on the maturity date T. Intrinsic value is expressed as:
According to the exercise price of the option and the current price of the underlying object, it can be divided into at-the-money, out-of-the-money, and in-the-money.
There are two directions of long and short in the transaction. Someone buys and someone sells. Corresponding to the investor who buys the option, the seller collects the premium and assumes the counterparty obligation of the option holder to buy and sell the subject matter.
According to different views on the future market trend of the subject matter, there are the following basic strategies:
Bullish: long call
Put: long put
Bullish: short call
Bearish: short put
The profit and loss of the call option is:
The profit and loss of 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 an uncertain environment 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 Real option, a way of corporate strategic decision-making, uses the option model to price project decisions
3) In enterprise 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:
At the same time, according to the option parity formula, bond value = SC = KP, which can also be understood as a creditor (holding corporate bonds), in essence, selling a put option (short put), collecting option fees, and buying at a risk-free rate into bonds. When it expires, if the company is insolvent and liquidated, that is, the put options held by shareholders are exercised, the creditors are essentially forced to buy the remaining assets of the company at the strike price; if the company survives, the shareholders will not exercise their rights, and the creditors will get back Risk-free income K, and earn option premiums.
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(2) Strategic combination
Based on long, short, bullish, and bearish, options can combine a variety of different profit and loss situations to fit the forecast point of view on the future market, without the need to predict specific ups and downs, and are highly combinable, such as predicting market fluctuations. fluctuations, fluctuations within intervals, fluctuations over time, etc.
Here are some basic strategies for option combinations:
Straddles: long call + long put or short call + short put, essentially long or short volatility.
Wide strangle: Same as strangle, only the strike price of the option used is different.
Butterfly Butterfly: short call (average value) * 2 + long call (real value) + long call (imaginary value); it is equivalent to a straddle with insurance to avoid the situation of limited benefits and unlimited risks.
Bull Spread Bull Spread: long call (lower strike price) + short call (higher strike price), which is equivalent to a call, but the increase is limited, and the maximum increase will not exceed the higher strike price. The bear market spread bear spread is the opposite, that is, short call (lower strike price) + long call (higher strike price).
The above is the strategy of part of the basic combination of options, and it can also be combined with the underlying to form a strategy, such as:
Protective put: long spot + long put, which provides protection for spot positions. It has the same profit and loss as long call, but the essence is different.
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Binance
3. Exchanges and asset management platforms are selling structured products
OKX
Only dual currency (launched relatively early)
Bybit
Dual Currency & Shark Fin (newly launched this year)
Bitget
Currently only dual currency, shark fin has been offline
Kucoin
Only dual currency (newly launched this year)
Matrixport
Currently only dual currency, Kucoin Wealth (not launched, expected in March) provides structured products and options
Asset management platforms have much richer products than exchanges, including Dual Currency, Trend Zhiying (spread strategy), Shark Fin, Range Hunter, etc.
Paypal
MetAlpha
Ribbon Finance（DeFi）
Rich product types
Liquidity is obtained from the option protocols Hegic and Opyn on Ethereum at the same time, and its product structure is worthy of in-depth study.
4. Product case, dismantling
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(1) Dual currency
The most common products currently on the market, including two directions of buying low and selling high, are essentially the Covered Call and Put Selling strategies mentioned above, with a simple structure.
The core issue is how the exchange matches the buyers and sellers of the options, and whether the liquidity is sufficient; if the exchange itself acts as the counterparty of the user, risk hedging needs to be considered.
The income of exchanges in products is not transparent. When different exchanges have the same time, spot price, execution price, and expiration date, there is a gap in income. There may be deduction of user option fees as handling fees, but it is packaged as no handling fee. .
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(2) Shark fins
Exchanges are rare (only OKX is listed), and asset management platforms are common. There are two directions of bullish and bearish, which are 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 rebate, so that investors will not lose money.
The same is true for bearish shark fins, just replace call with put.
Correspondingly, the two-way shark fin has two knock-out prices, up and down, and has one more potential income than the one-way shark fin: buy a fixed income + buy a call barrier option + buy a put barrier Options, long bond + long up-and-out call options + long down-and-out put options.
The option premium of barrier options with the same conditions is lower than that of vanilla options (because barrier options give up the possibility of upper-end income), so on the basis of fixed income, customers can be guaranteed capital income (interest income minus option premium).
The hedging of barrier options is relatively complicated, and some products may also set an observation period. Due to the existence of the strike price, the delta of the option will fluctuate significantly when it is approaching, and the difficulty of dynamic hedging is relatively high.
Another hedging idea is static hedging. At the beginning of the period, by combining a series of vanilla options on the market, a combination with the same cash flow state is copied. 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, and is equivalent to an ordinary call option in other cases, so:
1) The situation we need to deal with is only when the target price is higher than 120
2) Buy a vanilla call option with a strike price of 100
4) Finally, a long call option + N * short call option portfolio is formed, which constructs a cash flow equivalent to the barrier option
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(3) Airbag
The exchange does not have this product, and only some asset management platforms are selling it. By giving up part of the potential rise, in exchange for the protection of the price drop of the underlying asset, but there is a falling price (safety cushion) for this protection. The loss will not be borne within the scope of the safety cushion, but the loss will still be borne after the puncture. The loss amount is equal to the beginning of the period. Buy spot.
Its essential structure is: buy at-the-money call options, and simultaneously sell downward knock-in put options, that is, when the knock-in does not occur, the put option will not take effect, and the income from the sold option premium will offset the cost of the long call; When this occurs, the put option becomes effective, triggering the exercise, and being forced to buy the corresponding underlying at the exercise price.
It should be noted here that the upside participation rate of this product (that is, costs such as option fees + handling fees) cannot be too low, otherwise it will be significantly disadvantageous to investors. At this time, investors pay a high cost in exchange for a moderate level of protection. When the long-tail risks that really need protection occur, the protection is invalid and investors bear all losses. This is often missed in the scenario analysis of product descriptions.
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5. Risk factors and hedging
Risk Factors for Options—Greeks:
（1 ）Delta
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The degree of change in the option price when the price of the underlying asset changes by 1 unit
When holding an option position, the operation of making Delta 0 by increasing and decreasing the corresponding share of the underlying is called a Delta neutral strategy.
（2 ）Gamma
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Refers to the derivative of delta, that is, the degree of change in option delta when the underlying asset price changes by 1 unit, similar to the concept of delta change rate and acceleration
When Gamma is high, simply hedging delta is not enough (there will be errors), and other options need to be used to hedge Gamma to construct a Delta-Gamma neutral hedge.
（3 ）Theta
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Indicates how quickly an option loses value relative to time as the expiration date approaches.
One of the benefits earned by the option seller.
（4 ）Vega
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The Vega of the at-the-money option is the largest, and the deep real value and deep virtual value are close to 0.
（5 ）Rho
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