What are Perpetual Futures?

Unlike traditional futures, perpetual futures let you maintain market exposure without managing expiration dates or moving into a new contract. You can keep a position open for as long as you choose, provided you continue to have sufficient collateral to avoid liquidation.

Perpetual futures also offer leverage, which lets you open a larger position with a smaller amount of buying power upfront. Leverage can magnify both your potential profits and your losses.

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What are the Risks and Advantages?

Perpetual futures can provide flexible ways to gain market exposure, but they also involve significant risk. Before trading, it is important to understand how leverage, margin, funding payments, and market volatility can affect your position.

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Risks

• Leverage Risk: Leverage increases your market exposure and can magnify losses. Even a relatively small adverse price movement may result in a significant loss where leverage is used. In some cases, you may lose the entirety of the collateral allocated to a position.
• Liquidation Risk: Perpetual futures involve the risk of liquidation. If the value of the underlying asset reaches the liquidation price set for the position, some or the entirety of your position may be liquidated. In volatile markets, this can occur quickly.
• Funding Costs: Funding payments can affect your overall results. These payments may occur periodically while a position remains open and can increase the cost of holding a position over time. Depending on market conditions, funding payments may reduce your overall return even if the market moves in the same direction of your position.
• Price Gaps: For contracts linked to assets with defined market hours, prices may move significantly while the underlying market is closed. When the market reopens, a sudden price change may result in a gap that could increase losses or trigger liquidation.
• Price Differences: Perpetual futures prices may differ from the price of the underlying asset, particularly during periods of high volatility or low liquidity.
• Ongoing Position Monitoring: Because perpetual futures do not expire, open positions may require ongoing monitoring. Traders should regularly review their liquidation price, position size, market conditions, and any applicable funding costs.

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Advantages

• No Expiration Date: Unlike traditional futures contracts, perpetual futures do not have an expiration date. A position may remain open as long as you choose, provided you continue to have sufficient collateral to avoid liquidation.
• Leverage: Perpetual futures allow you to use leverage, as well as customize the leverage multiplier. This means you can control a larger position with a smaller amount of capital. While leverage can increase potential gains, it can also increase potential losses.
• Order Entry: Perpetual futures allow you to take a position based on whether you expect the market price to rise or fall. You can open a long position if you expect prices to increase or a short position if you expect prices to decrease.
• Exposure Without Ownership: Perpetual futures provide exposure to an underlying asset without requiring ownership. Depending on the product and leverage used, they may require less upfront capital than purchasing the asset directly.
• Extended Trading Access: Depending on the contract, perpetual futures may provide extended trading access, allowing you to manage positions outside the regular trading hours of the underlying market.
• Funding Payments: Funding payments may apply to perpetual futures positions in either direction. Depending on market conditions and whether you hold a long or short position, you may either pay or receive funding payments.

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Many of the characteristics that make perpetual futures attractive can also introduce additional risk. Leverage allows for greater exposure, but it also magnifies losses. Extended trading access can provide greater flexibility, but it can also expose positions to sudden price movements outside the regular trading hours of the underlying market.

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Perpetual futures are complex products and may not be appropriate for all investors. Before trading, make sure you understand how the contract works, how leverage affects potential gains and losses, and the risks associated with maintaining an open position.

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What is Perps Leverage?

Leverage allows you to open a perpetual futures position worth more than the futures buying power required to open it. For example, using $100 in future buying power at 5x leverage gives you $500 in market exposure.

Gains and losses are based on your total position size, so even small price movements can significantly affect the funds you commit. Leverage magnifies both potential profits and losses.

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Example:

Suppose you expect Bitcoin’s price to rise. On Webull, you open a Long position in BTCPERP using $100 in futures buying power at 5x leverage, giving you $500 in Bitcoin exposure. With this position, any price movements of Bitcoin affect your unrealized P&L at a rate of 5x the standard (non-leveraged) rate.

Price of Bitcoin rises 10%: Your Perp position's value increases by $50.

Price of Bitcoin falls 10%: Your Perp position's value decreases by $50.

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This example illustrates how leverage magnifies both potential gains and losses. These figures exclude trading fees and funding payments, and your position may be liquidated if its liquidation price is met.

While your position remains open, you may also pay or receive funding every eight hours, depending on the funding rate and the direction of your position.

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What are Funding Payments?

Perpetual futures do not expire. As a result, there is no forced convergence of the underlying and futures price as there is traditional futures expiration. Funding payments is the process used when trading perpetual futures to help keep the price of a perpetual futures contract aligned with the price of its underlying asset (spot).

Funding payments are exchanged between traders who hold long and short positions. They are not fees charged or collected by Webull.

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i. Funding Payments: How They Work

The funding rate is calculated every eight hours based on the average difference between the perpetual futures price and the underlying asset price during that period.

If the funding rate is positive, traders holding long positions pay traders holding short positions. If the funding rate is negative, traders holding short positions pay traders holding Long positions. If the funding rate is zero, no funding payment is made.

Funding payments are scheduled for 12:00 AM ET, 8:00 AM ET, and 4:00 PM ET.

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ii. Funding Payment Formula

A simple way to estimate a funding payment is:

Funding Payment = Position Value × Funding Rate

For example, if your position value is $10,000 and the applicable funding rate is 0.01%, the funding payment would be $1.

Whether you pay or receive that amount depends on the direction of your position and whether the funding rate is positive or negative.

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iii. How the Funding Rate is Determined

The funding rate uses a time-weighted average of the difference between the perpetual futures price and the underlying asset price during each eight-hour funding period.

The funding rate is capped at positive or negative 2% per funding period. If the absolute funding rate is less than 0.01%, the rate is set to zero, and no funding payment is made.

If the reference price feed used to calculate funding becomes unavailable, funding payments are paused until the feed is restored.

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iv. Funding Payments: Impacts to Your Account

Funding payments can affect the overall cost or return of holding a perpetual futures position. Depending on your position and the funding rate, you may either pay or receive funding.

Funding costs can accumulate when a position is held over multiple funding periods, particularly when leverage is used. As a result, funding is an important factor to understand when evaluating an open perpetual futures position.

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What is Perps Liquidation?

Liquidation occurs when the price of the underlying asset reaches your estimated liquidation price. When this occurs, the position may be automatically closed to limit further losses.

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i. Liquidation Triggers
A position may be liquidated when the market moves against you and your liquidation price is met.

Leverage can increase liquidation risk. A higher leverage factor may cause your liquidation price to be closer to your entry price, meaning a smaller price move against your position could trigger liquidation.

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ii. Liquidation Process

When a position is liquidated, orders are placed to close the position. Any remaining equity after the position is closed is returned to your account, subject to applicable losses.

For positions using isolated margin, liquidation generally applies only to the collateral allocated to that specific position rather than margin assigned to other positions or the overall account equity.

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iii. Liquidation Risks

Your liquidation risk is influenced by factors such as leverage, position size, available collateral, market volatility, and your position’s liquidation price.

Higher leverage generally places the liquidation price closer to your entry price, meaning a smaller market move against your position may result in liquidation.

With the same collateral, a larger position can generate greater losses from a price move against you, increasing liquidation risk.

Less collateral supporting your position leaves less room to absorb losses before liquidation.

Higher market volatility can cause rapid price swings, potentially pushing your position toward liquidation more quickly.

The closer the market price is to your estimated liquidation price, the smaller the move against your position needed to trigger liquidation.

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iv. Scheduled Maintenance

During scheduled exchange maintenance, the mark price may remain unchanged and liquidation activity may be paused. Liquidation monitoring resumes when normal exchange operations resume.

Understanding your liquidation price, available collateral, and leverage can help you better understand the risks associated with holding a perpetual futures position.

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What is Perps Collateral and Margin?

When you open a perpetual futures position, you allocate a portion of your available collateral to support it. This approach, known as isolated margin, assigns collateral to each position separately. The amount allocated works alongside your position size and leverage to determine your estimated liquidation price and how much the market can move against you before liquidation.

To understand how these pieces work together, let’s look at four key concepts: collateral, notional, liquidation price, and isolated margin.

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i. Collateral

Collateral is the cash you commit to support a perpetual futures position. It helps cover potential losses and affects how much the market can move against your position before liquidation.

Example: You have $1,000 in your account and allocate $200 to a position. That $200 serves as the position’s collateral.

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ii. Notional

Notional is the total value of your position, calculated by multiplying the futures buying power used by your selected leverage. Gains and losses are based on this notional value.

Example: Using $200 in futures buying power at 5x leverage gives you $1,000 in notional value. A 10% price move in your favor produces a $100 gain, while a 10% move against you produces a $100 loss, excluding fees and funding payments.

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iii. Liquidation Price

Your estimated liquidation price indicates when your position may be automatically closed. It reflects the collateral supporting your position and applicable risk requirements, including those affected by the underlying asset’s volatility. The liquidation price may be impacted by the maintenance margin for the position.

Maintenance margin for perps is set by the exchange and may be subject to change. The actual liquidation price may differ from the estimate shown.

Example: You open a Long Bitcoin perpetual futures position when Bitcoin is priced at $100,000. The platform displays an estimated liquidation price of $85,000. If Bitcoin’s price falls to $85,000, your position may be liquidated. Changes to your collateral or exchange requirements may impact this estimate.

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iv. Isolated Margin

Isolated margin lets you dedicate a specific amount of collateral to a position. The position’s estimated liquidation price is based on that allocated collateral rather than your overall futures account equity.

Example: You have $1,000 in your account and allocate $200 to an isolated position. The remaining $800 is not automatically used to support that position or determine its liquidation price. Allocating additional collateral may move the estimated liquidation price farther from your entry price.

Isolated margin helps manage risk separately for each position, but losses may exceed the allocated collateral during sudden or extreme market moves.