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Centralised finance (CeFi) has developed financial instruments, tools and strategies over the course of decades.

However, access to these instruments, tools and strategies have mostly been limited to a small group of people.

With the rise of blockchains and decentralised finance (DeFi), this has changed.

In this guide, we’ll take a look at two basic financial instruments you can find in DeFi — perpetual futures and options — and help you understand the differences between the two.

Perpetual Futures: What Are They?

Perpetual futures are derivatives that mimic the value of an underlying real world asset. The value is often determined by the index/spot price of the corresponding real world asset.

Let’s take gold for example.

What if you want exposure to the price of gold, but you don't want to deal with the hassle of the red tape, paperwork and storage considerations involved with actually owning gold?

This is where derivatives come in.

A derivative, i.e. a perpetual future of gold (AU-PERP), comes in a digital form and can be purchased online — no red tape, paperwork or storage.

As you can see, derivatives such as perpetual futures have been created to simplify trading.

For a more in-depth view of perpetual futures, read our Perpetual Futures / Perpetual Swap Contracts guide.

Options: What Are They?

Options, just like perpetual futures, are also derivatives.

They give you the right to buy or sell an underlying asset at a fixed price before a specific date (this is known as the ‘expiry date’).

Note that options give you the RIGHT to buy or sell, but you are not obliged to do so.

The right to purchase the underlying asset is referred to as a “call”, while the right to sell the underlying asset is called a “put”.

Options: A Detailed Look

In an options trade, buyers always pay a premium, while sellers receive a premium.

Now, let’s look at different use cases for options.

  • Buyer example

On the 1st of May 2022 you purchase a call option for BTC that expires on the 20th of July 2022 with a strike price of $45,000 and a premium of $2000 (paid to the seller of the option).

If, anytime before the 20th of July, the price of BTC is above $45,000 and larger than the premium you have to pay, you make a profit — basically BTC price > $47,001.

Say on the 18th of July the BTC price moons and trades at $52,000.

If you exercise your call option, meaning you purchase BTC at the strike price of $45,000, you're able to buy BTC at a discount.

But, you also need to pay the $2,000 premium.

So, $52,000 minus $45,000 minus $2,000 is your profit — $5,000.

If by the 20th of July the price of BTC is below $45,000, you obviously wouldn’t want to exercise your right to buy BTC with your option, as you can purchase it cheaper in the market anyway.

But, you’d still have to pay the premium to the seller of the option.

So in this case, your loss is $2,000.

  • Seller example

Let’s look at the previous example, but from the seller's perspective.

In our previous example you, the buyer, purchased a $45,000 call option on BTC.

This option was sold by another trader, the seller.

From the seller's perspective, the purchase is not a “call” but a “put” option.

When BTC moons to $52,000 and you exercise your right to purchase BTC at the strike price of $45,000, the seller loses money.

That’s because the seller needs to pay for both the price difference, $45,000 minus $52,000 plus the $2,000 premium he receives from you.

So in this case, the total loss on his put option would be -$5,000

If by the 20th of July the price of BTC is 38,000, you obviously want to exercise your right to sell BTC with your option.

But, you’d still have to pay the premium to the seller of the option.

So in this case, you gain the premium paid by the buyer of the call option — $2,000.

As you can see, options buyers have an unlimited upside and their risk is capped by the premium.

Option sellers on the other hand have the risk of an unlimited downside, while the premium caps their profits.

Comparison: Perpetual Futures vs. Options

As outlined above, both perpetual futures and options are derivatives.

Although they have a lot in common, there are some key differences.

Let’s take a look at a few of them:

  • Ease of use: The prices of perpetual futures follow the spot price of the underlying asset — as simple as that. The pricing of options can be quite complicated though. This is because countless variables such as delta, gamma and theta come into play, as well as the Black-Scholes-Merton (BSM) model. This might be a bit overwhelming at first, making perpetual futures more beginner-friendly.
  • Risk: Options limit your risk on one side — depending on whether or not you are the seller or buyer. Regardless, you’ll always be exposed to one side of the trade. Perpetual futures are also risky. For example, they are able to wipe out your entire collateral. Refer to our Perpetual Futures / Perpetual Swap Contracts guide for more on the topic of “liquidation''. Compared to options though, perpetual futures don’t cap your profit, meaning your long and short profits can grow indefinitely.
  • Flexibility: When you’re trading options, you have until the expiry date to choose whether you’d want to exercise your buy/sell right or not. The expiry date of options can be a downside. The closer options are to their expiry date, the lower their value becomes. And when the expiry sets in, options become completely worthless. This is not the case with perpetual futures. You can hold your perp positions as long as you want to, including all your profits and losses, as long as you have the collateral to back them up.

We hope our guide helped you in understanding the differences between perpetual futures and options.

Remember, using DeFi can be risky!

Disclaimer: This guide is strictly for educational purposes only and doesn’t constitute financial or legal advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.

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