Why You Should Switch from Perps to Options

Why You Should Switch from Perps to Options

As the cryptocurrency market continues to grow, so does the variety of financial instruments available to traders. While perpetual contracts (perps) have been the go-to choice for many, options offer superior risk management capabilities, which makes them an attractive choice for traders looking to minimize their downside exposure. Not understanding the fundamental differences between options and perpetual contracts (perps) could be the difference between having your stack liquidated and managing your risk effectively.

This series aims to educate traders on the potential benefits of trading options over perps and how options enable leverage with a better risk reward profile. As we progress, it will become obvious why options are becoming increasingly popular among savvy crypto traders and how options can help you optimize your strategy.

Options vs Perpetuals (Perps)

Options are a type of derivative that give the buyer the right, but not the obligation, to buy or sell an underlying asset at a predetermined price and time. Options have a strike price and an expiration date; their value is derived from the underlying asset's price and volatility. Not sure what these terms mean? Start here

Perpetual Contracts (Perps) are another type of derivative that allows traders to speculate on the price movement of an underlying asset without owning the asset. Unlike options contracts, which come with a set expiration date, perps can be held perpetually, meaning your position can stay open indefinitely without needing to be settled by a specific date. This offers greater flexibility for traders who don't want to be restricted by expiry deadlines. However, perps utilize a funding rate mechanism to manage price discrepancies between the perpetual contract and the underlying asset. This funding rate mechanism involves periodic payments between long and short positions - payments which can add up quick and eat into your margin.

Perps are often perceived as simpler to understand and trade compared to options, making them more appealing to beginners. Perps don't have an expiration date, only a funding rate, and, to a novice trader, feel closer to spot trading “but with leverage.” It requires less strategic forethought to buy a 3x perp than it does to execute an option trade. Perps often offer high leverage, which can lead to substantial profits in a short period. This high leverage appeals to traders looking for quick gains. If you’ve been in crypto for any amount of time, you can probably see where this is going…

Perpetual contracts (perps) are often designed to cater to traders seeking high leverage and quick profits. Due to their simplicity, they tend to attract inexperienced traders who may not have a well-defined trading strategy. Consequently, these traders can find themselves exposed to significant risks, potentially resulting in their position being liquidated. Even if a trader is correct about the direction of price movement, given enough time their position can become unprofitable and even liquidated by funding rate payments.

Perpetuals may seem easier for new traders, but perps can leave you perpetually fearing liquidation as the potential downside looms large.

It's a good question because options are quite popular in traditional markets and they offer numerous advantages over perpetuals that are hard to ignore once you grasp the basics. There are a few reasons why historically onchain options haven't received the same level of adoption as perpetuals.

Options involve understanding concepts like time decay, intrinsic value, and the option greeks, which can be a barrier to entry for beginners. However, once you familiarize yourself with these concepts, trading options becomes easy and intuitive. Besides, we all know it cannot be more complicated to understand than how a blockchain works.

If DeFi users learn complicated concepts all the time, there must be another reason perps have been more popular than options historically. We believe the reason onchain options have not taken off is that the trading experience has been lackluster. Between the confusing, clunky UIs and high collateral requirements that reduce overall capital efficiency, onchain options protocols have failed to garner traction with traders and the necessary trading volumes and liquidity to keep their flywheels going. Put simply, the opportunity doesn't seem worth it given the current collateral requirements.

Scholes Protocol is being designed to solve these inefficiencies and help grow the entire onchain options market. Creating a seamless and intuitive trading experience is a requirement for options trading to gain widespread adoption in the crypto space. Scholes is making it a priority to deliver a UI/UX that simplifies the options trading experience onchain.

Our platform is designed to be user-friendly, with clear visualizations and streamlined workflows that make it easy to understand and trade options. Whether you're a seasoned trader or just starting out, Scholes Protocol aims to provide the tools and resources you need to succeed in options trading.

Once you get the hang of trading options, you'll discover their numerous advantages over perps. Options provide better risk management and enable more complex strategies such as covered calls, straddles, and spreads. These strategies allow traders to tailor their positions according to their risk appetite and optimize their returns. This series is meant to introduce you to these various options trading strategies and how they can be utilized to manage your risk reward profile.

Options are a more precise financial instrument

While perps have been a popular choice among crypto traders due to their simplicity and high leverage, they come with significant risks. You might say that perps are a more blunt tool, with limited opportunities for risk management. 

On the other hand, options offer a more nuanced approach to trading, enabling traders to employ various strategies to manage and optimize their risk reward profile.

In summary, crypto traders seeking a more flexible, cost-effective, and risk-managed trading experience should consider switching from perps to options.

Up next, we're covering more complex options trading strategies and options versus perps in different market conditions. Thanks for reading and stay tuned for more coming soon.

Scholes Protocol aims to be the go-to platform for navigating the exciting world of on-chain options trading. Join the Scholes Community to be the first to hear updates when our public testnet is going live!

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