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Perpetual Futures vs Options

💡 Comparing Derivatives: Perps vs Options

What are options, what's the difference between perps and options, and what makes them useful in different situations?

Introduction

In both traditional and decentralized finance, perpetual futures and options stand out as some of the most popular instruments for trading and investing.

While they share some similarities in their function as financial derivatives products, their distinct characteristics make them suitable for different trading strategies and market conditions. Understanding these differences is crucial for traders looking to navigate the complexities of DeFi to a more effective extent.

Options are financial derivatives that give their holder the right, but not the obligation, to buy (call) or sell (put) a token like ETH at a specific price and date. They're flexible while providing inherent leverage, and have an upfront cost (premium).

Perpetual futures allow traders to speculate on the future price of an asset without being bound by an expiration date. They're often paired with margin (leverage), and come with their own set of risks.

Perpetual Futures vs Options: Pros

Both perpetual futures (perps) and options are derivatives, meaning their value is derived from an underlying token. However, they differ significantly in their structure, risk profile, and potential returns.

Pros of Options

  • Upfront Risk: The buyer of an option risks only the premium paid, not the total value of the underlying asset. 
  • Strategic Flexibility: Options can be used for various strategies, including hedging and speculation.
  • Cost-Effective Leverage: Options allow for significant leverage with a smaller initial investment.
  • Make Monies in Any Market Conditions: Different options strategies can net a profit in varying conditions: bearish, bullish, low vol, high vol, and even when the markets are chopping sideways.

Pros of Perps

  • High Leverage: Perpetual futures allow for substantial leverage, potentially magnifying potential gains (and losses.)
  • No Expiry Date: Unlike traditional futures and options, perps do not have an expiry date, allowing for more extended holding periods.
  • Simplicity: At a surface level, perps might be easier to understand and trade than options.

Premia Blue: Users can deploy different options strategies to net a profit in varying conditions: bearish, bullish, and even when the markets are chopping sideways.

Cons of Options

  • Premium Costs: Options require an upfront premium payment.
  • Time Decay: If prices stagnate, an option will lose value over time as the expiration date approaches.
  • Complex Pricing Models: Understanding things like options pricing and Greeks can be challenging for new traders.

Cons of Perps

  • Higher Risk: The high leverage can amplify losses as well as gains.
  • Funding Rate Payments: Traders might have to pay or receive funding rates, affecting profitability.
  • Market Liquidity Dependence: Profitability can be impacted by the liquidity of the underlying asset.

GMX: Traders can engage in trading perpetual futures, utilizing their unique features such as high leverage and the absence of expiry dates to execute strategies on varying timeframes or capitalize on short-term market movements.

Key Takeaways

  • Both options and perpetual futures are valuable tools in a trader's arsenal, each with unique advantages and disadvantages.
  • Options offer strategic flexibility and limited risk but come with the cost of premiums and new concepts such as options pricing and Greeks.
  • Perpetual futures provide high leverage and simplicity but carry higher risks and are sensitive to market liquidity.
  • Platforms like Premia Blue and GMX offer traders the opportunity to utilize these instruments effectively, catering to a wide range of strategies and risk appetites.
  • A thorough understanding of both instruments can enable traders to tailor their strategies to different market scenarios and objectives, maximizing their trading efficiency and effectiveness.
Test Yourself!

What is one of the key advantages of using options over perpetual futures?

  • Options have no expiry date.

  • Options are less complex to understand and trade.

  • The buyer of an option risks only the premium paid.