Perpetual Futures vs. Quarterly Futures-What’s the difference
- New Guidance
One of the biggest attractions in futures trading is the ability to gain leveraged exposure to the underlying cryptocurrency at a fraction of its total market value. This means that you can magnify small movements in price to potentially generate outsized profits.
There are many different financial instruments to trade. At Huobi Futures, we offer derivative contracts trading through two flagship products: Perpetual and Quarterly Futures.
A common question we receive from users is this: what are the differences between the two products and what are the key features that distinguish them?
A traditional futures contract allows a trader to buy or sell the underlying asset at a predetermined price before a specified period. In other words, futures contracts have a limited lifespan and will expire based on their respective calendar cycle. For instance, our BTC 0930 is a quarterly futures contract that will expire 3 months upon the date of issuance.
On the other hand, perpetual futures, as the name suggests, do not have an expiration date. Traders do not need to keep track of various delivery months, unlike traditional futures contracts. For instance, a trader can keep a short position to perpetuity, unless liquidation occurs.
As a trader, you need to be aware of the various expiration dates as this influences your exit strategy. There are two expiration-related terms that you need to understand before you get started. These terms are expiration date and roll over.
The expiration date is the last day a trader can trade the contract. For instance, BTCUSD 0930 quarterly contracts will expire on Sep. 30th, 2022, while BTCUSD 1230 will expire on Dec. 30th, 2022. Prior to expiration, a trader has three options:
- Close the position before expiry.
- Roll over from the front month to a further-out month.
- Let the contract expire and settle.
As perpetual contracts do not expire, there is no requirement for users to ‘roll over’ their positions to the next calendar contract.
Roll over refers to the transition from the front-month contract that is close to expiration, to another contract in a further-out month. They are rolled over to a different month to avoid the costs and obligations associated with the settlement of the contracts. To roll over a futures contract, one can simply sell his or her front-month contract, and buy against another contract in a further-out month. For example, if you are long 10 contracts of BTCUSD September, you will sell 10 September contracts and simultaneously buy 10 December contracts.
Traders will determine when they need to move to a new contract by watching the volume of both the expiring contract and the further-out-month contract. Typically, volume on the expiring contract will decline as it approaches the expiration date.
A trader may roll over any time before the expiry but it is best advised to roll over a few days ahead of the expiry date as market liquidity will decline drastically as traders move over to a new contract. This effect results in larger spreads and may lead to slippages.
3. Funding Fee
Unlike perpetual futures, quarterly contracts do not carry a funding fee. This is favorable to long-term position traders and hedgers as funding fees may fluctuate over time. In extreme market conditions, high funding fees can be costly to maintain a long-term position in the market.
Funding calculations consider the amount of leverage used, which may have a big impact on one’s profits and losses.
As shown in the chart above, funding fees across BTC perpetual markets surge as Bitcoin prices rally, this indicates the imbalance of buying pressure in the market. As such, this effect results in long positions becoming more costly to hold over time.
From the chart, we observed that funding fees have doubled in a matter of hours from 0.05% to 0.1%, as demand for BTC futures exceeds. In this instance, a $100,000 position would have cost you $100 in funding fees.
4. Trading Strategy
Quarterly Futures offers a multitude of trading opportunities and enables you to construct strategies that offer uncorrelated returns to the general market. These strategies are common in traditional futures markets and they can be applied to cryptocurrencies as well.
Here are some market-neutral strategies that you can consider:
A basis trade consists of a long position in the underlying crypto-asset and a short position in its derivative (in most cases, this refers to futures contracts). Basis refers to the price difference between the futures contract and the underlying spot market. It can be positive or negative, but usually, futures contracts trade at a premium to the spot market. Typically, the further away a contract’s expiration date is, the larger the basis.
Spread trading is the simultaneous buying and selling of two related futures contracts. For example, if you bought the BTCUSD September contract and sold the BTCUSD December contract, you would have a spread trade. In a spread trade, you are trading the price differential between two contracts. In a spread position, you would want the long side of the spread to increase in value relative to the short side or vice versa.
5. Closing Thoughts
Perpetual and quarterly futures are designed to cater to the specific needs of users. Overall, the futures market offers unparalleled flexibility, which allows traders to go long and short on a cryptocurrency using leverage. Also, this flexibility allows traders to create market-neutral strategies that offer uncorrelated returns to the broader market.
Futures are especially useful for portfolio diversification. If you’re considering trading futures, it’s important to understand the pros and cons of perpetual and quarterly futures. To get the most out of trading futures, you can start with finding the right exchange and diversifying your portfolio.