Crypto-Style Perpetual Futures Will Soon Be Available For Individual Stocks. Here's What Investors Need to Know.

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Single-stock perps could disrupt traditional options trading.

Ten years ago, BitMEX launched the first perpetual futures ("perps") for cryptocurrencies. Today, these derivatives drive most of the world's crypto trading volume.

Several overseas platforms subsequently launched equity perps for individual stocks, and the CFTC greenlit their trading in the U.S. in early November. On the surface, equity perps resemble stock options without expiration dates. But let's dig deeper to see how these derivatives might shake up the market once they're more broadly adopted.

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Single-stock perps are simpler than options. In traditional options trading, an investor buys a contract to either buy a stock (a call) or sell it (a put) at a fixed price at a future date.

With a perp, an investor simply takes a bullish or bearish position in a stock, deposits cash as collateral, and chooses a leverage ratio that amplifies their gains or losses. If you deposit $100 at 10x leverage, you'll gain $1,000 exposure to an underlying stock.

If the underlying stock price starts at $100 and rises 10% to $110 per share, your leveraged position grows to $1,100 -- which gives you a $100 profit on your $100 deposit. If it declines by 10% to $90 per share, your position shrinks to $900, resulting in a $100 loss. The platform is set to automatically liquidate your entire position before it wipes out your deposit.

To pin the perp's price to the underlying stock without strike prices or expiration dates, buyers and sellers pay each other funding fees. Whenever the contract trades at a premium to the stock, the longs pay the shorts; when it trades at a discount, the shorts pay the longs.

The simpler mechanics, lack of expiration dates, and use of leverage can make perps more appealing than traditional options.

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