How Do Options on Perpetual Futures Differ from Standard Crypto Options?
Standard crypto options settle against the spot price of the underlying asset. Options on perpetual futures (perps) settle against the price of the perpetual futures contract.
Since the perpetual futures price is constantly tethered to the spot price via the funding rate, the difference is often minimal. However, the use of perps as the underlying can introduce funding rate volatility into the options pricing model.
Glossar
Futures Contract
Leverage ⎊ Futures contracts in cryptocurrency represent agreements to buy or sell an underlying asset at a predetermined price on a future date, functioning as a derivative instrument that allows for amplified exposure without immediate asset ownership.
Perpetual Futures Price
Valuation ⎊ Perpetual futures price refers to the current market price of a perpetual futures contract, which differs from traditional futures contracts by having no expiration date.
Options on Perpetual Futures
Contract ⎊ Options on perpetual futures are derivatives where the underlying asset is a perpetual futures contract, rather than the spot cryptocurrency itself.
Funding Rate Volatility
Cost ⎊ : The funding rate represents the periodic cost or credit associated with maintaining a leveraged position in perpetual swaps, reflecting the premium paid by longs to shorts or vice versa.
Perpetual Futures
Structure ⎊ Perpetual Futures are a type of derivative contract, native to the cryptocurrency market, that allows traders to speculate on the future price of an underlying asset without a fixed expiration date.
Options Pricing
Model ⎊ Options pricing refers to the quantitative methods used to determine the fair value of a derivatives contract based on various market inputs.