Understanding Crypto Futures Expiration | by LBank Exchange | May, 2023

From the LBank blog.

Understanding Crypto Futures Expiration

Typically, Bitcoin futures contracts are a popular way to buy or sell bitcoin at a fixed price in the present for settlement at a specific expiration date. However, there are also perpetual contracts that allow trading without the restriction of an expiration date. Both of these contracts are considered derivative financial products that track the price of the underlying asset, which, in this case, is BTC.

Perpetual contracts are often used for trading and speculation, particularly by those who prefer to trade derivatives instead of directly dealing with the asset. On the other hand, traditional futures contracts are commonly used for risk hedging since they allow the pre-fixing of buying and selling prices.

It’s also worth noting that some bitcoin futures contracts are settled in BTC at expiration, while others are settled in dollars. Crypto futures contracts remain a popular tool for traders seeking exposure to the volatile and rapidly evolving world of cryptocurrencies, but regardless of the settlement method, it is important to understand the concept behind any expiration.

LBank Futures is a top cryptocurrency derivatives trading platform, providing traders with a broad selection of various crypto-to-crypto trading pairs. This vast selection allows traders to engage in leveraged trading and to open both short and long positions on a wide variety of cryptocurrencies, from popular DeFi tokens to meme coins like Dogecoin and Shiba Inu. LBank Futures is known for its high liquidity, making it one of the most liquid derivatives exchanges in the market.

In futures trading, the expiry date (or expiration date) is the moment when an open position automatically closes. Traders must make a decision regarding their position before the expiry date approaches, either by manually closing it, allowing it to expire, or potentially rolling it over depending on the contracts being traded.

Upon expiry, a settlement process is initiated by the exchange (LBank Futures) to close out all outstanding positions in the expiring contract.

On futures expiration dates, traders have several options available to them. One option is to close out their position before the contract expires. This is a common practice among short-term traders, who seek to avoid any unexpected market volatility or complications that may arise from contract settlement.

For those looking to maintain their position in the underlying product over the long-term, there is the option of rolling over their contract to a further-out expiration date. This involves placing a trade in a different futures contract with a later expiration date, effectively transitioning from the expiring front-month contract to another contract in a further-out month. By doing so, traders can avoid the costs and obligations associated with settling the contract.

Ultimately, traders have the option to close out their position, roll over to a further-out contract, or let the contract expire and settle. Short-term traders often choose to close their positions to avoid unexpected volatility, while long-term traders may opt to roll over their contracts to maintain their position without incurring the costs of settlement.

The impact of expiry dates on a position’s value varies depending on the financial product in question. For spread bets, expiry dates play a crucial role in driving liquidity in the market, but they do not affect the value of the position. Similarly, CFDs do not have expiry dates, and therefore the position’s value remains unaffected.

However, when it comes to options, the expiry date can significantly influence the value of the contract. After the contract expires, it becomes worthless, so the longer the time until the expiry date, the more opportunity the market has to reach the strike price. The strike price is the price at which an option can be exercised, and the underlying asset can be bought or sold. Therefore, if you have two options with identical strike prices, the one with the later expiry date has a better chance of becoming “at the money” or “in the money.”

Futures contracts, on the other hand, involve an obligation to buy or sell an asset at a predetermined price when the contract expires. The expiry date does not affect the value of the futures contract, as it must be settled regardless of the market value or spot price. In summary, while expiry dates have a significant impact on other derivatives products, they only determine the settlement of futures contracts.

The expiration of futures contracts can have a significant impact on the price of Bitcoin and other cryptocurrencies. In comparison to the expiration of stock options or commodity futures, which typically result in increased trading volume and volatility, the impact of futures expiration on cryptocurrencies is less pronounced but still noteworthy.

During the period leading up to futures expiration, there is often a surge in trading activity as traders adjust their positions. This can result in increased price volatility in both the derivatives market and the underlying asset. Additionally, short-term traders may take profits, further contributing to the volatility. This spill-over effect can impact the overall cryptocurrency market, causing increased volatility in the run-up to futures expiration.

Wrapping Up

Futures contracts come with a predefined lifespan and expire based on a specified calendar cycle. Upon expiry, a settlement process is initiated by the exchange to close out all outstanding positions in the expiring contract.

To avoid the expiration and potential delivery of the underlying asset, traders can choose to “roll over” their positions by transitioning from the expiring front-month contract to a new contract with a later expiration date. This process allows traders to maintain their market exposure without taking physical delivery of the underlying asset.

Disclaimer: The opinions expressed in this blog are solely those of the writer and not of this platform.

This article came directly from the LBank blog, found on https://lbank-exchange.medium.com/understanding-crypto-futures-expiration-61dff6199f76?source=rss-87c24ae35186——2

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