Derivatives Overview

• Derivative: A financial contract whose value is derived from an underlying asset’s price (e.g., BTC, ETH). You don’t own the coin—just a bet on its future price.
• Futures Contract: An agreement to buy or sell an asset at a predetermined price on a specific future date. Locks in today’s price for tomorrow’s delivery.
• Perpetual Swap: A type of futures with no set expiry date. You can hold it indefinitely but pay or receive a small funding fee to keep your position open.

️ Contract Specifications

• Underlying Asset: The cryptocurrency the derivative tracks (e.g., BTC/USD, ETH/USD).
• Contract Size: The amount of the underlying asset one contract represents (e.g., 1 BTC).
• Tick Value: The profit or loss per minimum price movement (tick) of the contract.
• Settlement Date: For traditional futures, the date when the contract expires and is settled in cash or delivery.
• Funding Rate: In perpetual swaps, periodic payments exchanged between longs and shorts to tether the contract price to the spot price.

Position & Direction

• Long: You buy a contract expecting the price to rise. Profits accrue when the underlying price goes up.
• Short: You sell a contract expecting the price to fall. Profits accrue when the underlying price goes down.
• Leverage: Borrowed funds that amplify your exposure. 10× leverage means controlling 10 BTC with 1 BTC of collateral—wins and losses are magnified.
• Margin: Collateral you must deposit to open and maintain a leveraged position.
  • Initial Margin: Minimum collateral to open a position.
  • Maintenance Margin: Minimum collateral to keep a position open; falling below triggers a margin call.

Risk & Liquidation

• Margin Call: A warning that your collateral has fallen near the maintenance margin, requiring you to add funds or reduce position size.
• Liquidation Price: The price level at which the exchange automatically closes your position to cover losses if your margin falls too low.
• Bankruptcy Price: The theoretical price where your remaining margin would be completely wiped out.
• Cross Margin: Uses your entire wallet balance to avoid liquidation, sharing margin across all positions.
• Isolated Margin: Allocates margin per position, limiting risk to the amount assigned.

Fees & Costs

• Trading Fee: Charge per trade, often a small percentage of the notional value.
• Funding Fee: Periodic payment in perpetual swaps between longs and shorts based on the funding rate.
• Overnight Fee: In some futures, a fee charged for holding a position past a certain time (less common in crypto).
• Rollover Fee: Cost to extend a futures position past expiry by swapping into the next contract (for non-perpetual futures).

Advanced Metrics

• Open Interest (OI): Total number of outstanding derivative contracts. Rising OI alongside price can confirm the strength of a trend.
• Basis: The difference between the futures price and the spot price; positive basis (contango) means futures trade above spot, negative (backwardation) means below.
• Implied Volatility (IV): The market’s forecast of how much the underlying asset will swing over the life of an option (more common in options, but sometimes referenced in futures context).
• Liquidation Levels: Visual or data tools showing where many traders’ positions will be liquidated—can act as magnet points in price action.

Feel free to pin this thread as your essential reference. If you’d like more terms or examples added, let us know in the comments below!*