The Difference Between Standard and Perpetual Futures

In the world of trading, futures contracts are a fundamental component, allowing investors to speculate on the future price of assets. However, among the various types of futures contracts, standard futures and perpetual futures are two prominent forms, each with its own unique characteristics and uses. Understanding the differences between these two types of futures contracts is crucial for making informed trading decisions.

Standard Futures Contracts: Standard futures contracts are agreements to buy or sell an asset at a predetermined price on a specific future date. These contracts are typically used for commodities, financial instruments, and other assets. Key features of standard futures contracts include:

• Expiration Date: Standard futures contracts have a set expiration date. On this date, the contract must be settled either by physical delivery of the asset or by cash settlement.
• Settlement: Depending on the contract, settlement can be either physical, where the underlying asset is delivered, or cash-settled, where the difference between the contract price and the market price is paid.
• Contract Size: Each futures contract has a standard size, which varies depending on the asset class. For example, in oil futures, one contract typically represents 1,000 barrels of oil.
• Margin Requirements: Traders are required to maintain a margin account with a certain amount of capital to cover potential losses. This margin is a percentage of the contract’s total value.
• Delivery and Expiration: As the expiration date approaches, traders may need to decide whether to close their positions or roll them over to a future contract.

Perpetual Futures Contracts: Perpetual futures contracts are a newer innovation, designed to address some of the limitations of standard futures contracts. Unlike standard futures, perpetual futures do not have an expiration date. Key features of perpetual futures contracts include:

• No Expiration Date: Perpetual futures are designed to be held indefinitely, allowing traders to maintain positions without worrying about expiration.
• Funding Rate: To ensure the price of perpetual futures stays close to the underlying asset’s price, a funding rate is applied. This rate is exchanged between long and short positions at regular intervals (e.g., every eight hours). The funding rate can be positive or negative, depending on market conditions.
• Leverage: Perpetual futures often allow for higher leverage compared to standard futures contracts. This means traders can control larger positions with a smaller amount of capital.
• Continuous Settlement: Unlike standard futures, perpetual futures are settled continuously, with profits and losses reflected in real-time.
• Liquidity: Perpetual futures typically offer higher liquidity compared to standard futures, making it easier for traders to enter and exit positions.

Comparing Standard and Perpetual Futures:

Feature	Standard Futures	Perpetual Futures
Expiration Date	Fixed expiration date	No expiration date
Settlement	Physical or cash settlement	Continuous settlement
Funding Rate	Not applicable	Applies regularly
Leverage	Generally lower	Generally higher
Contract Size	Standardized per asset	Varies by platform
Margin Requirements	Fixed margin requirements	Can vary based on leverage
Liquidity	Can be lower	Typically higher

Practical Considerations:

• Volatility: Perpetual futures can be more volatile due to higher leverage and frequent funding rate adjustments. Traders need to be mindful of the risks and manage their positions accordingly.
• Cost of Carry: In standard futures, the cost of carry (e.g., storage, interest) can affect the pricing of futures contracts. Perpetual futures eliminate this factor as they do not expire.
• Trading Strategy: Traders who prefer to hold positions for an extended period without worrying about expiration may find perpetual futures more suitable. Conversely, those who are interested in specific expiration dates and physical delivery might prefer standard futures.

In conclusion, while both standard and perpetual futures serve the purpose of allowing traders to speculate on the future price of assets, they cater to different needs and trading styles. Standard futures are characterized by their fixed expiration dates and settlement methods, while perpetual futures offer flexibility with no expiration and continuous settlement. Understanding these differences can help traders select the appropriate futures contract for their trading strategy.