Perpetual What? Perpetual Futures, Explained (…Finally)

Yes that’s right folks the moment you’ve all been waiting for. After this article, you’re gonna sound so cool telling all the babes at the parties that you definitely know what “trading perpetuals” actually is.

‘Crypto Perpetuals’, also known as perpetual options, allow traders to take long (bullish) or short (bearish) position on cryptocurrencies without having to wait for an expiration date.

Traditional or “Standard” option contracts typically have settlement dates where the owner is able to either exercise their contract or let it expire, entirely at their discretion.

As a cryptocurrency trader (eh, general trader) who has been in the space for over 8 years, I have found perpetual options to be extremely useful tools for managing risk and capturing opportunities across different market conditions.

That being said they’re 100% a double edged sword in that they can be just as damaging (typically moreso) in exposing a trader to risk and unnecessary volatility!

In simple terms, perpetual options work very similarly to traditional futures contracts except that there is no expiration date. This means that traders can hold their positions indefinitely until they decide to close out their contracts. Under the hood, exchanges employ mechanisms like funding rates(typically a few Points in Percentage) to keep perpetual option prices aligned with the underlying cryptocurrency markets.

For a 5-year-old to understand, perpetual options are like placing a bet on whether the price of Bitcoin or another cryptocurrency will go up or down. With normal futures, you have to wait until a certain date to find out if you won the bet. But with perpetual options, you can find out at any time by closing out your bet early. The exchange makes small adjustments each day to make sure the bets stay close to the real price.

As a trader, I find perpetual options extremely useful for several reasons:

- They allow me to go long or short with leverage without having to worry about an expiration date. This gives me flexibility to hold positions as long as I want based on my analysis and risk appetite.

- The lack of expiration means there is no expiry decay to contend with. I can focus purely on price action and volatility without any time decay factors muddying the waters.

- Funding rates ensure the perpetual prices stay aligned with the spot market. This synchronization is very important for maintaining an edge as prices can diverge in the case of futures contracts approaching expiry.

- Perpetual options have much higher liquidity than regular futures, especially for smaller cryptocurrencies. This means it's easier for me to enter and exit positions without significantly moving the markets.

While perpetual options provide traders like myself numerous advantages, it's important to understand the risks as well:

- Leverage can work both ways - it amplifies not just profits but losses too. So risk management is key when using leverage with perpetual options.

- Funding rates may mean needing to put up more collateral if rates move against open positions. Traders need to account for this in their position sizing.

- Exchanges operating the perpetual markets could experience issues like outages. There's also counterparty risk if an exchange is hacked or goes bankrupt.

In summary, perpetual options are a powerful tool for cryptocurrency traders that provide flexibility without expiration dates. With appropriate risk management, they can be effectively used to profit from both bull and bear markets. But leverage also brings on extra risk that needs to be respected.

FAQs:

Q: How do perpetual options differ from regular futures contracts?

A: The main difference is the lack of an expiration date with perpetual options. This means traders can hold positions indefinitely until they decide to close rather than having to close by a certain expiration date. Funding rates also ensure perpetual prices stay aligned with the underlying spot market.

Q: What are funding rates?

A: Funding rates are payments exchanged between long and short traders on perpetual option contracts each 8 hours. Their purpose is to incentivize traders to close positions that are profitable for the exchange, thereby keeping perpetual prices aligned with the real spot market. Positive funding means longs pay shorts and vice versa when funding is negative.

Q: How much leverage can be used with perpetual options?

A: Most cryptocurrency exchanges that offer perpetual options provide up to 100x leverage depending on the trader's account level and trade size. However, using excessive leverage greatly increases risk, so most experienced traders use between 2x to 10x leverage for risk management purposes.

Q: Are perpetual options regulated?

A: No, perpetual options are generally not regulated as they are considered derivative products traded on cryptocurrency exchanges. This means there is no oversight on issues like customer funds protection. Traders must do their own due diligence on exchange counterparty risk.

Q: What are some examples of cryptocurrencies offered as perpetual options?

A: The most popular cryptocurrencies traded as perpetual options include Bitcoin, Ethereum, Litecoin, Ripple and many others. Exchanges typically offer perpetual markets for the top 10-20 cryptocurrencies by market cap. Smaller altcoins may have less liquid perpetual option markets.

— hope yall found this informative, definitely follow if you’re curious for more as I’ll be releasing more articles specifically surrounding futures trading as we move forward

🥰 xoxo, Nico