Key Terminology

Master the language of structured products. Understanding these terms is essential for effective trading.

Core Concepts

Structured Product

A pre-packaged investment combining multiple financial instruments (stocks, bonds, derivatives) to create a customized risk-return profile.

Underlying Asset

The base asset (BTC, ETH, stock, index) that the structured product’s value depends on.

Example: In a BTC covered call, Bitcoin is the underlying asset.

Notional Amount

The face value or principal amount of the position. Represents the size of your exposure.

Example: Trading 1 BTC at $50,000 = $50,000 notional.

Strike Price

The predetermined price at which an option can be exercised. Critical for defining payoff structure.

Example: A call option with $55,000 strike means you can buy at that price.

Premium

The upfront payment for an option. Income for sellers, cost for buyers.

Example: Selling a covered call for $2,500 premium = immediate $2,500 income.

Maturity / Expiry

The date when the structured product or option expires. After this, the contract is settled.

Example: 30-day option expires in 30 days, triggering settlement.

Option Terminology

Call Option

The right (but not obligation) to buy an asset at the strike price before expiry.

Long Call: Bullish bet, profits from price increases Short Call: Bearish/neutral bet, collects premium

Put Option

The right (but not obligation) to sell an asset at the strike price before expiry.

Long Put: Bearish bet, profits from price decreases Short Put: Bullish bet, collects premium

In-The-Money (ITM)

An option with intrinsic value if exercised now.

Example: BTC at $55,000, call strike $50,000 = $5,000 ITM

At-The-Money (ATM)

An option where the spot price equals (or is very close to) the strike price.

Example: BTC at $50,000, call strike $50,000 = ATM

Out-Of-The-Money (OTM)

An option with no intrinsic value if exercised now.

Example: BTC at $50,000, call strike $55,000 = OTM

Intrinsic Value

The immediate exercisable value of an option.

Call Intrinsic Value = Max(Spot - Strike, 0)
Put Intrinsic Value = Max(Strike - Spot, 0)

Example: BTC $55,000, call strike $50,000 → Intrinsic = $5,000

Time Value

The additional value of an option beyond intrinsic value, representing the potential for favorable price movement before expiry.

Time Value = Option Premium - Intrinsic Value

Example: Premium $7,000, Intrinsic $5,000 → Time Value = $2,000

Moneyness

How far ITM or OTM an option is, expressed as percentage.

Call Moneyness = (Strike / Spot) - 1
Put Moneyness = (Spot / Strike) - 1

Example: Spot $50k, Strike $55k → Call is 10% OTM

Greeks (Risk Metrics)

Delta (Δ)

Sensitivity to $1 change in underlying price.

Range: 0 to 1 (calls), 0 to -1 (puts)

Example: Delta 0.5 means option moves $0.50 for every $1 spot move

Gamma (Γ)

Rate of change of Delta. Measures how fast Delta changes.

High Gamma: ATM options, Delta changes rapidly Low Gamma: Deep ITM/OTM, Delta stable

Theta (Θ)

Time decay per day. How much option value erodes daily.

Sellers earn Theta: Time working for you Buyers pay Theta: Time working against you

Example: Theta -$50 means losing $50/day from time decay

Vega (V)

Sensitivity to 1% change in implied volatility.

High Vega: Long-dated, ATM options Low Vega: Short-dated, deep ITM/OTM

Example: Vega $40 means $40 gain per 1% IV increase

Rho (ρ)

Sensitivity to 1% change in interest rates. Usually negligible for short-dated crypto options.

Volatility Terms

Historical Volatility (HV)

Realized volatility based on past price movements. What actually happened.

Calculation: Standard deviation of past returns, annualized

Example: BTC moved 2% daily last month → ~30% annualized HV

Implied Volatility (IV)

Market’s expectation of future volatility, derived from option prices.

High IV: Market expects big moves, options expensive Low IV: Market expects calm, options cheap

Example: IV 80% means market prices in 80% annual volatility

Volatility Smile/Skew

Pattern where OTM puts have higher IV than ATM options, reflecting fear of crashes.

Crypto Skew: Often steep, as tail risk is high

Realized Volatility

Actual volatility that occurs over the option’s life. Only known after expiry.

Position Types

Long Position

Owning an asset or option. Benefits from price increases (calls) or decreases (puts).

Risk: Premium paid (options) or full asset value (spot)

Short Position

Selling an asset or option you don’t own. Profits from price decreases (or stability for options).

Risk: Unlimited (naked calls) or limited to premium (covered)

Covered Call

Selling a call option while owning the underlying asset.

Max Profit: Premium + (Strike - Entry Price) Max Loss: Entry price - Premium

Cash-Secured Put

Selling a put option while holding cash to buy the asset if assigned.

Max Profit: Premium Max Loss: Strike - Premium

Naked Option

Selling an option without owning the underlying (call) or cash reserves (put).

Risk: Very high, potentially unlimited

Payoff & Risk Terms

Payoff Diagram

Visual representation showing profit/loss at different underlying prices at expiry.

X-axis: Spot price at expiry Y-axis: Profit/Loss

Break-Even Point

The underlying price where you neither profit nor lose.

Call Long Break-Even = Strike + Premium
Put Long Break-Even = Strike - Premium

Example: Buy call strike $55k, pay $5k → BE = $60k

Maximum Profit

The highest possible gain from a position.

Covered Call: Limited to Strike - Entry + Premium Long Call: Unlimited Short Put: Limited to Premium

Maximum Loss

The worst-case scenario loss.

Covered Call: Entry - Premium (if spot goes to zero) Long Call: Premium paid Short Put: Strike - Premium

Risk-Reward Ratio

The potential gain versus potential loss.

Risk-Reward = Max Profit / Max Loss

Example: Risk $5,000 to make $10,000 → 2:1 reward/risk

Capital Protection

The percentage of initial capital guaranteed at maturity.

Example: 100% capital protection = no loss possible

Participation Rate

The percentage of upside you capture.

Example: 80% participation = you get 80% of gains

Pricing & Valuation

Fair Value

The theoretical price of an option based on pricing models (Black-Scholes, Monte Carlo).

Example: Model says call worth $2,500 based on inputs

Bid-Ask Spread

The difference between the highest price a buyer will pay (bid) and lowest price a seller will accept (ask).

Tight Spread: Liquid market, low transaction cost Wide Spread: Illiquid, high transaction cost

Mark-to-Market (MTM)

Valuing positions at current market prices daily.

Example: Bought at $5k, now worth $7k → $2k MTM profit

P&L (Profit & Loss)

Your current gain or loss on a position.

Realized P&L: Closed positions Unrealized P&L: Open positions

Settlement Terms

Exercise

Activating the right to buy (call) or sell (put) at the strike price.

American Style: Can exercise anytime before expiry European Style: Can only exercise at expiry

Assignment

Being obligated to fulfill the option contract if the buyer exercises.

Example: You sold a call, buyer exercises → you must sell at strike

Cash Settlement

Settling the option with cash payment rather than physical delivery.

Example: Instead of delivering BTC, pay cash difference

Physical Settlement

Delivering the actual underlying asset upon exercise.

Example: Buyer exercises call → you deliver 1 BTC

Rolling

Closing an existing option and opening a new one with different terms.

Example: 30-day call expiring → close it, sell new 60-day call

Product-Specific Terms

Covered Call / Buy-Write

Owning underlying + selling call option

Goal: Generate income from premium Trade-off: Cap upside at strike

Principal Protected Note (PPN)

Capital protection + option exposure

Components: Zero-coupon bond + call options Guarantee: Return of principal at maturity

Range Accrual / Accumulator

Earn yield if price stays within range

Daily Accrual: Earn interest each day in range Barrier: Lose if price exits range

Autocallable / Callable Note

Automatically matures early if trigger hit

Trigger: Usually price reaching certain level Early Redemption: Get principal + return

Knock-In / Knock-Out Barrier

Options that activate (knock-in) or deactivate (knock-out) if barrier reached.

Knock-In: Becomes active only if barrier hit Knock-Out: Becomes worthless if barrier hit

Risk Management

Hedging

Taking offsetting positions to reduce risk.

Example: Long BTC + short call = hedged position

Delta Hedging

Adjusting positions to neutralize directional risk (Delta = 0).

Example: Short 10 calls (-4 delta) + buy 0.4 BTC = neutral

Stop Loss

Predetermined exit level to limit losses.

Example: Exit if position loses more than $5,000

Diversification

Spreading capital across multiple uncorrelated positions.

Concentration Risk

Having too much exposure to single asset or strategy.

Market Participants

Market Maker

Provides liquidity by quoting both bid and ask prices. Profits from spread.

Retail Trader

Individual investor trading their own capital.

Institutional Investor

Banks, funds, corporations trading large amounts.

Counterparty

The other side of your trade. Who you’re trading with.

Counterparty Risk: Risk they can’t fulfill obligations

Common Abbreviations

Quick Reference: Key Formulas

Option Payoffs at Expiry

Long Call Payoff = Max(Spot - Strike, 0) - Premium
Short Call Payoff = Premium - Max(Spot - Strike, 0)

Long Put Payoff = Max(Strike - Spot, 0) - Premium
Short Put Payoff = Premium - Max(Strike - Spot, 0)

Covered Call

Max Profit = Premium + (Strike - Entry)
Max Loss = Entry - Premium
Break-Even = Entry - Premium

Time to Expiry (Annualized)

τ (tau) = Days Remaining / 365

Moneyness

% OTM (Call) = (Strike / Spot - 1) × 100
% ITM (Call) = (Spot / Strike - 1) × 100

Practice Exercise

For each scenario, identify:

1. Is the option ITM, ATM, or OTM?
2. What’s the intrinsic value?
3. If premium is $3,000, what’s the time value?

Scenario A

• BTC Spot: $50,000
• Call Strike: $55,000
• Premium: $3,000

Scenario B

• ETH Spot: $3,000
• Put Strike: $2,800
• Premium: $500

Scenario C

• BTC Spot: $60,000
• Call Strike: $55,000
• Premium: $7,000

Next Steps

Now that you know the terminology:

• What are Structured Products? - See terms in context
• Understanding Greeks - Deep dive into risk metrics
• Your First Covered Call - Apply the terms

Tip: Bookmark this page as a reference. These terms appear throughout the platform and in financial discussions.