How Does the Lack of an Expiration Date Affect the Time Decay (Theta) of a Perpetual Contract?
Unlike traditional options or futures, perpetual contracts do not have a fixed expiration date, meaning they do not experience time decay (theta). The value of a perpetual contract is not eroded over time as it is constantly maintained near the spot price by the funding rate mechanism.
This lack of theta is a key advantage, as traders do not have to worry about the time-based erosion of their position's value, simplifying long-term directional speculation.
Glossar
Perpetual Contracts
Mechanism ⎊ Perpetual contracts, fundamentally, represent agreements to buy or sell an asset at a specified future date, differing from traditional futures through the absence of an expiration date; this continuous settlement is achieved via a funding rate, exchanged between long and short positions to anchor the contract price to the underlying spot market.
Time Decay
Erosion ⎊ ⎊ Time decay, within cryptocurrency options and financial derivatives, represents the systematic reduction in an instrument’s extrinsic value as its expiration approaches.
Volatility Component
Framework ⎊ The volatility component, within cryptocurrency derivatives, options trading, and broader financial derivatives, represents a quantifiable element contributing to the overall volatility surface.