Redesigning Dual Investment Products for a Bear Market

In this article, we examine the design of existing dual investment products across CeFi platforms and DeFi Option Vaults (DOVs). We identify a common problem that may affect their performance in a bear market. We further propose an easy fix to this problem.

Orbit Markets
4 min readDec 10, 2022

Dual investments are popular strategies in both CeFi and DeFi for yield enhancement. Crypto platforms, such as Matrixport and Binance, and DeFi option vaults (DOVs), such as Ribbon Finance, offer such products which consist of selling a vanilla call or a put option while simultaneously being long the underlying or USD respectively. Users can potentially earn a high yield as they sell the optionality embedded in such products.

Limitations of existing dual investment products

When a user invests in a dual investment product involving the sale of a call option, it is usually required that the user deposits in the same underlying token. For example, a user must deposit BTC if he’s looking to sell BTC call options. Such design is to ensure that the user can always cover the settlement obligations of the options she sold and will never default on those options in any possible scenario.

To understand this point, let’s imagine a user who deposits USD 20,000 instead of BTC to sell a BTC call option with a strike price at 20,000. If the BTC price was at 30,000 at maturity, the user would lose 30,000–20,000 = USD 10,000 and she would still have USD 10,000 left of her deposit; if the BTC price was at 40,000, the user would lose 40,000–20,000 = USD 20,000 which is her entire deposit; and if the BTC price was anywhere above 40,000, the user would lose more than what she initially deposited and her net asset value would go negative.

Now, if the user deposited BTC instead, she would never be in such a situation. If BTC was above the strike price at maturity, no matter how far it went, she can always use her BTC deposit to settle the option. Whether the BTC price was at 20,000, 30,000 or 100,000, she would always just need to pay 1 BTC and receive the strike back in USD. She would miss out on the big rally, but her net asset value would never go under water.

This is why most CeFi platforms and DOVs have made their “covered call” strategies available only to depositors in the underlying token, e.g. BTC, and similarly their “covered put” strategies to USD depositors. If a user wants to sell calls, she must deposit BTC and if she wants to sell puts, she must deposit USD. By imposing such restrictions, platforms and vaults avoid any situation where they need to liquidate a user’s position since the value of the deposit will never be lower than the maximum option payout.

However, such design has a problem that may hurt users’ returns in a bear market.

The best strategy in a bear market

Selling call options on its own could be a good strategy in a falling market, but it may not be the best strategy if you have to hold the underlying token of which you believe the price will fall. As discussed above, existing dual investments require that you hold BTC to be able to sell BTC call options. The option may expire worthless if the price goes down, which works out for you on selling the call option, but the value of your deposit, which is in the same token, will go down as the market falls.‍

The best strategy in a bear market is probably a combination of keeping the principal in USD and selling call options. If the price fell, the value of your principal would be preserved in USD and you would make gains from selling the call options. However, such a combination is currently unavailable as existing dual investment products require that you deposit the underlying token, not USD.

Is there a way to allow users to deposit USD while still making sure the payoff of the call option cannot be greater than the value of the USD deposit? Yes, there is an easy fix. Instead of a single call option, the product can employ a so-called “call spread” strategy, which consists of simultaneously selling a call option with a lower strike price and buying a call option with a higher strike price. For example, you can sell a call option with a strike at 20,000 and buy a call option with a strike at 40,000. In this way, your maximum loss is capped at the amount of your USD deposit. Such a tweak will allow users to sell call options while owning USD, rather than the underlying token.

With no sign that a raging bull market will come back anytime soon, providers of dual investment products, whether CeFi platforms or DOVs, should consider adding new variations to their existing offerings so that users can pick any combination that best suits their views and objectives.

About OrBit

OrBit Markets is an institutional liquidity provider of options and structured products in digital assets. Founded by a team of leaders in finance and tech, and backed by Matrixport and Brevan Howard Digital, OrBit brings its expert know-how in options to the crypto derivatives market. Headquartered in Singapore, OrBit serves institutions across CeFi, DeFi and TradFi looking for more sophisticated investing and hedging solutions in digital assets. For more information, visit

Important Disclaimer

This article is intended for educational purposes only and does not constitute the provision of investment advice and is not intended to do so. OrBit specifically disclaims all liability for any direct, indirect, consequential or other losses or damages that may arise from any reliance on this article.

Trading in cryptocurrencies, derivatives and structured products may involve a high degree of risk and may not be appropriate for all investors. Under some market conditions, it may be impossible to liquidate a position. Investors may suffer substantial losses and even lose the entire amount of your investment.

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