Everlasting Options - The Greeks
The greeks of an everlasting option are determined by two factors: Its money-ness (ITM, OTM, ATM) and its funding interval.
In this article, we’ll explore the greeks of an everlasting option.
We will assume that the everlasting option has a funding interval of 1 hour. We chose this particular interval since it’s the default funding interval on Everstrike.
The everlasting option provides continuous gamma exposure. The gamma is maximized when the everlasting option is ATM, and when the funding interval is short.
An everlasting option with a funding interval of 1 hour is effectively an intraday option. To understand why, check out the previous article in this series.
The closer to expiration an option is, the higher the gamma. This makes intraday options, and, in turn, the everlasting option, very high gamma.
The gamma is maximized when the option is ATM. Everlasting options with floating strikes (pinned to a relatively short average, such as the 21-hour EMA) are ATM most of the time, making them the best option for traders wanting continuous and cheap gamma exposure.
An everlasting option with a 1 hour funding interval tends to have a really low vega. Why? Because it’s effectively an intraday option. Intraday options have really low vega, because they expire soon, and aren’t impacted by volatility in the same way as longer-dated options.
Everlasting options with a higher funding interval (such as 7 days) will have higher vega, but are not common in practice.
If you’re looking for forward volatility exposure, a typical everlasting option is not the way to go. You’d be better off buying a longer-dated European-style option or trading a volatility index.
A theta decay grows progressively bigger and more severe, as the underlying option gets closer to expiration. While an everlasting option does not expire per se, it can be effectively thought of as an intraday option. This makes the theta decay of the everlasting option very high. Every funding period carries a large theta decay along with it, and as such also a large cost for holders of the option (funding payment). The funding payment is maximized when the everlasting option is ATM and the implied volatility of the underlier is high.
Holding an everlasting option is a constant dilemma: You want to maintain your gamma exposure, but you don’t want to pay any additional funding. At the same time, sellers are constantly wondering: “Are we collecting enough funding? Can it cover our losses if there is a big move in the underlier?”
Since everlasting options with a funding interval of 1 hour effectively behave like intraday options, the absolute value of their delta (AbsDelta) tends to be higher, on average, than for regular European-style options.
The everlasting option in its vanilla form (funding interval of 1 hour) provides high and continuous gamma exposure, high and continuous theta decay (dispersed through funding payments) and low exposure to vega.
For the vast majority of traders, options is all about gamma and theta. For them, the everlasting option either provides a cost-efficient and convenient way of maximizing their gamma exposure over time, or it provides a way for them to collect a steady stream of funding payments, while being short volatility.
For traders that want to directly capture changes in forward volatility, rather than spot volatility, longer-dated European-style options and niche everlasts (everlasting options with a large funding interval) would both be a better choice.