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Perpetual option (XPO) definition 

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Perpetual options (XPO) are option contracts without an expiration date. Typically, a standard option contract gives its holder the right to purchase or sell a specific amount of an asset for a predetermined price, before or at an expiration date. The life of a standard option contract could range from days to years.

What is a perpetual option?

Perpetual options come under the category of exotic option contracts, as they differ from traditional options in their expiration dates. 

Furthermore, options contracts have two variations: American and European. American options are more flexible than European options and allow holders to exercise their option rights any time before or on the day of expiry. European options only allow holders to execute their contracts on the day of expiration.

Perpetual options are a form of American-style option and are also referred to as Perpetual American options.

Perpetual options give investors unlimited time to reach their predetermined strike price. However, the use of perpetual options is limited and trading in perpetual options only takes place in over-the-counter (OTC) markets.

In the OTC market, assets change hands directly between counter parties without the need for a centralised exchange. Trading in OTC markets is usually facilitated by a network of brokers.

Perpetual option example

As with standard option contracts, perpetual option traders can trade contracts tracking various underlying securities, including equities, bonds, commodities and cryptocurrencies. 

Option contracts are of two types: call options and put options. Call options allow holders to buy the underlying asset at the predetermined price, while put options allow holders to sell the underlying asset at strike price. 

Below is an example of how a perpetual option works: 

A trader is bullish about the future of iPhone maker Apple. They go to an OTC market to buy a perpetual call option contract tracking Apple stock.

Let’s say Apple stock (AAPL) is trading at $100 and the trader sets a strike price, or exercise price, of $150. 

The strike, or exercise price, of an option contract is the most important indicator of an option’s value. The price difference between the strike price and the underlying stock price decides the value of an option contract.   

If the price of an Apple share jumps to $200, the option contract will be “in the money”, meaning the contract has an intrinsic value. With Apple stock trading above the strike price, the trader can choose to exercise his contract and buy Apple stock, now worth $200, at the predetermined strike price of $150. The trader will realise profits if they sell the stock immediately after choosing to exercise their option. 

Since the contract has no expiry date, the trader can hold the option contract in the hope that Apple stock rises even higher. Perpetual options are also referred to as “everlasting options”.

The trader can choose to sell the contract to a buyer, who will pay a premium fee if the market price for Apple stock is above the contract’s strike price.

Perpetual contracts in crypto

A number of cryptocurrency exchanges offer perpetual futures contracts trading services, including Binance and BitMEX.

Future contracts differ from option contracts as parties in a futures contract are obligated to buy or sell the underlying asset at a predetermined price, whereas there is no such obligation for option contract holders.

Options and future contracts are used by traders to profit from market speculation, volatility and leveraged positions, and to hedge against risky exposures in their portfolios.

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