Derivatives are powerful financial instruments that derive their value from the performance of an underlying asset. They play a crucial role in modern trading, enabling market participants to hedge against adverse price movements, speculate on future price trends, and manage risk more effectively. Whether you're new to crypto derivatives or looking to deepen your understanding, this comprehensive guide breaks down the key components—including contract types, margin mechanics, and pricing models—using clear, SEO-optimized language for better readability and search visibility.
Types of Derivatives Contracts
Understanding the different types of derivatives contracts is essential for making informed trading decisions. The three primary categories available on major platforms include perpetual contracts, delivery (or futures) contracts, and options contracts.
Perpetual Contracts
Perpetual contracts are a popular form of derivative because they do not have an expiration or settlement date, allowing traders to hold positions indefinitely. This flexibility makes them ideal for both short-term speculation and long-term hedging strategies.
On most platforms, perpetual contracts come in several varieties:
- USDT-margined
- USDC-margined
- Inverse contracts (coin-margined)
One defining feature of perpetual contracts is the funding rate mechanism, which helps keep the contract price aligned with the underlying spot market.
How Funding Rates Work
Funding is exchanged between long and short position holders every 8 hours—at 00:00 UTC, 08:00 UTC, and 16:00 UTC—based on the current funding rate and the value of open positions.
- If the funding rate is positive, longs pay shorts.
- If the funding rate is negative, shorts pay longs.
The formula for calculating funding fees is simple:
Funding Fee = Position Value × Funding Rate
This mechanism discourages prolonged deviations between the perpetual contract price and the index price, promoting market equilibrium.
Delivery Contracts (Futures)
Unlike perpetuals, delivery contracts—also known as futures—have a fixed expiration date. These contracts settle automatically at the end of their term, with common cycles including:
- Weekly (this week, next week, third week)
- Monthly (this month, next month, third month)
- Quarterly (this quarter, next quarter)
Settlement occurs at 08:00 UTC on the expiry date, based on the average index price over the final 30 minutes before expiration.
There are two main settlement methods:
- Cash-settled contracts (USDT/USDC): Profits and losses are paid in stablecoins; no actual transfer of the underlying asset occurs.
- Inverse contracts: Settled in the base cryptocurrency (e.g., BTC or ETH), meaning payouts are made directly in the asset itself.
These contracts are widely used by institutional traders and hedgers who want exposure to price changes without holding the asset long-term.
Options Contracts
Options provide another layer of strategic flexibility. Bybit offers European-style options, meaning they can only be exercised at expiration—not before—with BTC, ETH, or SOL as underlying assets.
Key features:
- Pricing determined by Last Traded Price (LTP) and implied volatility (IV)
- Settlement and margin denominated in USDT or USDC
The theoretical price of an option is calculated using the Black-76 model, which takes into account:
- Forward price
- Strike price
- Time to expiration
- Risk-free interest rate
- Implied volatility
Implied volatility is derived from advanced volatility surfaces such as:
- Spline Volatility Surface
- SABR Model
These models help ensure accurate pricing even during volatile market conditions.
Margin Types in Derivatives Trading
Margin acts as collateral to open and maintain leveraged positions. Understanding margin types is critical to managing risk and avoiding liquidation.
Initial Margin
This is the amount of funds required to open a new position or add to an existing one. It’s typically expressed as a percentage of the total position value and varies depending on leverage levels.
Maintenance Margin
This represents the minimum equity needed to keep a position open. If your account balance falls below this threshold due to adverse price movement, you may face liquidation.
Different contract types and leverage ratios have varying maintenance margin requirements. Traders should always monitor their margin ratio closely to avoid unexpected closures.
👉 Learn how to optimize your margin usage and protect your positions during high-volatility events.
Index Price: Ensuring Market Fairness
To prevent manipulation and reflect true market value, exchanges use an index price—a weighted average of spot prices from multiple reputable exchanges.
Factors influencing index calculation:
- Real-time data availability
- Exchange trading volume
- Deviation between spot price and volume-weighted average price (VWAP)
By aggregating data across platforms, the index price provides a reliable benchmark unaffected by outliers or localized price spikes.
Mark Price: Preventing Unfair Liquidations
The mark price is used to calculate unrealized profit and loss (PnL) and determine liquidation triggers. It prevents traders from being unfairly liquidated due to temporary price slippage or thin order books.
Mark Price Calculation by Contract Type
Perpetual Contracts
Mark Price = Median(Price1, Price2, Last Traded Price)Where:
- Price1 = Index Price × [1 + (Latest Funding Rate × Time Remaining Until Next Funding)]
- Price2 = Index Price + 5-Minute Moving Average
The 5-minute moving average is computed every second as:
MA[(Bid + Ask)/2 - Index Price]This smoothing technique ensures stability during rapid market swings.
Delivery Contracts
Mark Price = Index Price × (1 + Basis Rate)The basis rate reflects the difference between futures and spot prices as expiration approaches.
Options Contracts
Mark price is derived using the Black-76 model, incorporating forward price, strike price, time to expiry, interest rate, and IV from either Spline or SABR volatility surfaces.
When the mark price reaches a trader’s liquidation price, the position is automatically closed to prevent further losses.
Frequently Asked Questions (FAQ)
Q: What is the difference between mark price and last traded price?
A: The last traded price reflects the most recent transaction on the order book, which can be volatile. The mark price is a smoothed, fair-value estimate used for PnL calculation and liquidation checks.
Q: Why do funding rates change every 8 hours?
A: Funding rates adjust periodically to align perpetual contract prices with the spot market. Changes depend on supply and demand imbalances between longs and shorts.
Q: Can I avoid paying funding fees?
A: Yes. You can minimize or avoid fees by closing your position before the funding timestamp (00:00, 08:00, or 16:00 UTC).
Q: How is implied volatility calculated for options?
A: IV is derived from observed market prices using sophisticated models like SABR or Spline surfaces, which account for skew and term structure.
Q: What happens when a delivery contract expires?
A: The contract settles automatically using the 30-minute average index price. Cash-settled contracts pay out in USDT/USDC; inverse contracts settle in the underlying cryptocurrency.
Q: Is it safer to trade perpetuals or delivery contracts?
A: Neither is inherently safer—they serve different purposes. Perpetuals offer flexibility; delivery contracts provide clarity around expiry and settlement.
Understanding derivatives—from perpetuals and futures to options and margin mechanics—empowers traders to build smarter strategies. With accurate pricing models like index and mark prices, modern platforms ensure transparency and fairness in fast-moving markets. Whether you're hedging risk or seeking leverage, mastering these concepts is key to long-term success in digital asset trading.
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