Constant Expiry Perpetual Options
Constant Expiry Perpetual Options
Last updated
Constant Expiry Perpetual Options
Last updated
vDEX is the first DEX offering constant expiry perpetual options (CEPOs). When trading traditional options, the expiry date is known and remains fixed for the life of the trade. CEPOs, on the other hand, have a continuously rolling expiry instead of a fixed one. This feature renders the option perpetual and allows traders to keep their exposure for as long as they want. Profits and losses are computed and settled live; the perpetuity of positions comes from an implicit and continuous rebalancing every 8 hours in traders’ positions and sizes.
Let’s illustrate this with a simple example:
Let’s assume trader A buys a one-month expiry ATM call option on BTC, with BTC trading at 65,000 USDT (ATM means “At the money”, i.e. strike price = 65,000 USDT). Since BTC's price has swung a lot over the whole month, BTC returns to that 65,000 USDT level at the expiration date. The call option expires worthless, and trader A would have lost all the premiums paid upfront for this option.
Conversely, trader B buys a one-month ATM CEPO call (he does not pay anything upfront but needs to post margin). After one month, BTC still trades at 65,000 (same as for trader A), but in this case, trader B still holds a one-month CEPO call as if his position had been continuously rolling into new ATM one-month call options.
Of course, trader B, at that point, will not hold as many call options as he initially did because of the continuous theta (time value) losses on his options. However, he still has a one-month call option (losing theta every day on a month option is not as bad as losing theta for 30 days on a traditional option as theta accelerates when the time to expiry gets as minimal as 8 hours) with high volatility given the swings on that month. If BTC moves up by 25% the next day, he will likely recoup a lot (if not all) of the negative unrealised PnL.
Trader A was also correct in his view that BTC would go up soon, but his forecast was wrong by one day, and he lost all his investment.
Perpetual options give traders a chance to be slightly wrong in their timing. If they had expected a big move to happen over a certain period but the move does materialise only slightly after, they could still benefit overall.
Another benefit for traders is the liquidity this product will create. Because vDEX will only offer a few expiries to trade (1w, 2w, 1m, 3m and 6m) and with constant moneyness (ATM), all traders are buying/selling these 5 ATM options with different expires.
Results in
1）Tighter spreads
2）Traders will not be trapped into odd expiry/strike structures that no one else wants to trade or quote (at reasonable prices, at least)
3）Transparency will also be improved as everyone will focus on the ATM volatility term structure. An elegant way of avoiding the smile surface conundrum for the benefit of all: liquidity and opacity issues, as well as difficulty for market makers to maintain smiles, are all eliminated at once.
Hence, this product provides excellent advantages for long, delta-hedged positions (with gamma always at the highest), providing a fantastic hedge against big moves in the prices of the underlying assets.
CEPSOs are a new type of perpetual spread trade created by vDEX, building on our constant expiry perpetual options (CEPOs).
CEPSOs work similarly but use the unique CEPO structure. There is one leg with an at-the-money CEPO and a second leg with an out-of-the-money CEPO.
For example, if Bitcoin is trading at $10,000, a CEPSO might combine:
Long 1x CEPO call struck at $10,000
Short 1x CEPO call struck at $12,000
Their max loss is capped at the difference in the strike prices minus the premium paid. But they have uncapped upside if Bitcoin rallies above the higher strike.
Like regular CEPOs, the CEPSOs provide rolling expiration dates and concentrated liquidity. However, the spread structure limits downside risk. Traders can benefit from volatility while defining their maximum loss.
CEPSOs aim to make spread trading more accessible. The defined-risk structure and perpetual expirations allow traders to benefit from volatility over any timeframe they choose.
A spread trade combines two options contracts - typically calls and puts at different strike prices. The most common is a bull call spread, combining a long call option with a short call at a higher strike. As you recall, all are ATM, and now CEPSOs are bringing ITM/OTM for more complex strategies.
