Perpetual options (also known as XPOs) are financial derivatives that give investors the right (but not obligation) to buy or sell an asset at a specified price at any time. This is in contrast to traditional options that have a predetermined expiry date to the contract. Perpetual options give investors the flexibility to exercise their option whenever they see fit.
Intuitively, perpetual options are (traditional) options contracts—with a very short expiration date—that is continually rolled over right before expiring.
Perpetual options are not commonly found on TradFi exchanges, as they are exotic options. They may, however, trade over-the-counter.
How do Perpetual Options Work?
Streaming-premia-driven: The buyer of the option pays nothing upfront to open the position, but instead pays a (relatively small) fee on a block-to-block basis to keep their position open. This is the model that Panoptic uses. The streaming-premia-driven perpetual options (AKA Panoptions) do not need a price oracle.
How do Perpetual Options Compare to Perpetual Futures ("Perps")?
Option-like payoffs: Perpetual options give option-like (puts, calls, multi-leg strategies) payoffs, while perpetual futures (AKA "perps") give leveraged long/short payoffs.
Streaming Premia vs Funding Rate: Perpetual options on Panoptic are priced based on continuous fees generated by real trading activity in the spot markets (specifically, the underlying AMM pool). Perpetual futures prices are kept "in line" with spot market prices via a "Funding Rate" that is typically based on the difference between the future and spot prices.
Panoptic's perpetual options streaming premia accrue every block (e.g. 12 seconds on Ethereum), while perpetual future funding rates on centralized exchanges are typically charged every few hours (e.g. 8 hours).
No Expiration: Both perpetual options and perpetual futures ("perps") are perpetual products which never expire. Both implement continuous payment mechanisms to ensure convergence of derivative prices to their "fair" value. For perpetual options, their pricing converges to Black-Scholes pricing of comparable European options. For perpetual futures, their pricing converges to spot prices of the underlying assets.
Comparing Perpetual Options to Traditional Options
There are a few key differences between perpetuals and traditional options. We outline some of them below.
Expiration: The most notable difference between perpetual options and traditional options is the lack of an expiration date. Traditional options have a fixed expiry date, after which the option becomes worthless. Perpetual options, on the other hand, can be exercised at any point, giving investors more flexibility.
Liquidity Fragmentation: Traditional options liquidity is fragmented over various expiry dates. Perpetual options do not suffer liquidity fragmentation over multiply expiries, since there is no expiration date.
Width of an Option: Perpetual option liquidity on Panoptic is divided over multiple "widths" (AKA range factors or r-values). The "width" of an option is comparable to its effective timescale - that is, the estimated time in which the option becomes "out of range". Traditional options have no concept of "width".
Decentralization: Perpetual options are traded on decentralized exchanges, offering increased transparency compared to traditional options, which are primarily traded on centralized exchanges.
Accessibility: DeFi-based perpetual options are more accessible to a broader range of investors due to their lower entry barriers and the absence of intermediaries.
Benefits of Perpetual Options
Flexibility: Perpetual options provide investors with the flexibility to exercise their options at any time, allowing them to capitalize on market movements and manage risk more effectively.
Portfolio Diversification: The addition of perpetual options to an investment portfolio can help improve diversification and potentially enhance returns. Perpetual options also allows for better risk management through hedging and "The Greeks"
Leverage: Perpetual options enable investors to gain exposure to an underlying asset with relatively little upfront capital, providing them with the potential for higher returns.
Reduced Counterparty Risk: As perpetual options are traded on decentralized exchanges, they are less susceptible to counterparty risk compared to traditional options traded on centralized exchanges.