Crypto-Style Perpetual Futures Will Soon Be Available For Individual Stocks. Here's What Investors Need to Know.
Single-stock perps could disrupt traditional options trading.
Ten years ago, BitMEX introduced the first perpetual futures (perps) for cryptocurrencies, which have since become the backbone of global crypto trading. In early November, the CFTC approved the trading of equity perps for individual stocks overseas, and U.S. exchanges like CME and ICE are now offering them. Equity perps function similarly to stock options but without expiration dates, offering investors a straightforward way to take either a bullish or bearish position.
By depositing funds as collateral and selecting a leverage ratio, traders amplify their gains or losses. For example, a $100 investment with 10x leverage gains exposure equivalent to $1,000 in an underlying stock. If the stock price rises 10% to $110, the leveraged position grows to $1,100, resulting in a $100 profit on the initial $100 deposit.
Conversely, a 10% decline to $90 per share reduces the position to $900, leading to a $100 loss. The funding fees paid between buyers and sellers keep the perp's price aligned with the underlying stock, eliminating the need for strike prices or expiration dates. These perps attract traders with their simpler mechanics, potential for higher gains, and lower initial investment compared to stocks.
However, despite the CFTC's approval, major U.S. brokerages like E*Trade and Charles Schwab have not adopted them yet, as they face legal challenges from trade groups concerned about stricter regulations to protect retail investors. Nonetheless, the integration of equity perps could encourage active trading in a market affected by recent interest rate hikes, potentially benefiting investors seeking more dynamic trading opportunities.
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