Caryoynencin is a toxic and antifungal fatty acid derivative produced by a number of plant‐pathogenic and insect‐protective bacteria (Trinickia caryophylli and Burkholderia spp.). In addition to the reactive tetrayne unit, the presence of an allylic alcohol moiety is critical for antimicrobial activities. By a combination of mutational analyses, heterologous expression and in vitro reconstitution experiments we show that the cytochrome P450 monooxygenase CayG catalyzes the complex transformation of a saturated carbon backbone into an allylic alcohol. Unexpectedly, CayG employs a ferritin‐like protein (CayK) or a rubredoxin (CayL) component for electron transport. A desaturation‐hydroxylation sequence was deduced from a time‐course study and in vitro biotransformations with pathway intermediates, substrate analogues, protegencin congeners from Pseudomonas protegens Pf‐5, and synthetic derivatives. This unusual multifunctional oxygenase may inspire future biocatalytic applications.