Can You Trade Options On Crypto – Derivatives are financial instruments that offer exposure to an underlying asset, such as a commodity such as oil or gold, or a cryptocurrency such as Bitcoin. The value of derivative financial instruments is linked to the value of the underlying asset. Options and futures are two different types of financial derivatives that investors use to speculate on market prices, hedge risk, and diversify their portfolios.
Although futures and options share similar trading fundamentals, they are used for different trading strategies, as seen in the key differences between the two instruments.
Can You Trade Options On Crypto
Crypto futures represent the value of a specific cryptocurrency at a specific time. These are agreements between traders to buy or sell a specific asset at a predetermined price at a specific date in the future. In a traditional futures contract, the position holder is obligated to buy or sell the underlying asset at the contract price at expiration.
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Traders can make profit or loss based on their positions ie. long or short, and the price forward. You can take a long position when you expect the price of the asset to increase and a short position when you expect the price to decrease. For example, if the current market price of Bitcoin is $10,000, you can buy (long) or sell (short) a futures contract in anticipation of an increase or decrease in price.
If you decide to buy this contract and the price of Bitcoin rises to $20,000 by the expiration date of the contract, you will make a profit of $10,000. Alternatively, if the price falls to $5,000 by the expiration date of the contract, you will have a loss of $5,000. Liquidation occurs when you misinterpret the movement of the crypto futures market, resulting in the termination of your open position.
Futures provide traders with the opportunity to trade quarterly and perpetual futures. Quarterly futures contracts expire after three months, while perpetual futures have no expiration date.
Like cryptocurrency futures, the value of options contracts is tied to the value of the underlying asset. Options are derivatives that allow traders to buy or sell an asset at a predetermined price at a future date. However, unlike futures contracts, option contract holders can choose not to buy or sell the underlying asset after expiration.
What Is Crypto Options Trading?
In other words, crypto options give the holder the right, but not the obligation, to buy or sell an asset at a predetermined price and date. Options generally allow traders to reduce the risk of loss and avoid potential liquidation associated with futures contracts. For this right, the buyer pays an upfront fee to the option writer, known as a premium.
There are different types of options, the most common options are calls and puts. Call options give traders the option to buy an asset on a specific date, while call options allow them to sell an asset on a specific date.
For example, you buy a $10,000 Bitcoin call option expecting the asset’s price to rise. Since it is an option contract, you will have to pay a premium, in this case $400.
Now assume that the price of Bitcoin falls to $5,000 on the expiration date of the contract. In this case, you can choose not to exercise your options properly. However, the $400 premium you paid to purchase the contract will not be refunded.
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Options and futures are derivative instruments that do not require ownership of the underlying asset. In the case of digital assets, this mechanism allows investors to gain exposure to cryptocurrencies without having to purchase and store them.
Traders and investors can use options and futures contracts as hedging instruments. Hedging is a risk management strategy used to reduce or eliminate financial losses. This is usually done by opening two offset positions.
For example, let’s say Bob buys a token at $20 per share and predicts that its price will rise. To protect against a sharp drop in the value of the token, Bob buys a put option at $16, paying a commission (premium) of $2 per token. The strike price in an option contract is the price at which the underlying asset can be bought or sold. Now, if the price of the token falls to $10, Bob can exercise his contract and sell the token for $16, cutting his losses. In case the market turns bullish, he does not need to execute his contract and would only lose the premium of $2 per token.
Futures also help business owners and investors hedge against market risks. For example, there is a clothing company that knows it needs to buy 10,000 pounds of cotton in three months to fulfill a consumer order. Suppose the current price of cotton is $10 per pound. To hedge against potential market volatility, the company can buy cotton futures for $9 a pound. This includes the company’s purchase and allows it to buy cotton at $9 a pound for three months, regardless of the market price of the commodity at the time. If the company does not buy the futures and the price of cotton rises from, say, $10 to $14 a pound in three months, the company will have to incur higher costs to secure the order.
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Both types of derivative contracts allow traders to gain exposure to the underlying asset at a fraction of the cost through leverage. This allows traders to buy or sell a large contract with relatively little capital. Keep in mind that with leverage comes increased risks, so it’s important to implement risk management strategies when handling derivatives.
One of the main differences between the two tools is how they work. The buyer of the option has the option not to execute the contract if the market goes against his position. In contrast, the holder of a futures contract must execute the contract at expiration, regardless of market conditions.
Option buyers must pay an upfront commission to the seller at the time of purchase, ie. premium. A futures contract allows you to open a position without paying an initial commission. Importantly, depending on the exchange, you may have to pay some fees, including trading fees and funding rates for crypto futures.
Time decay refers to the decrease in value of an option contract as it approaches the expiration date. The time decay increases as the contract expires, so there is less time to realize profits. In the case of futures contracts, the passage of time does not affect the valuation of the contract.
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Because option traders have the option of not exercising their contracts, their loss is limited to the premium they have to pay for the contract. Buyers benefit because the maximum loss is limited to a fixed premium, regardless of how much the underlying asset moves. In contrast, futures involve liquidity risk, as leveraged positions have volatile price movements and can reduce the trader’s initial investment with little or no effort. Forced liquidation can occur when your wallet balance cannot cover the coverage requirements of your open position. These contracts are riskier because there is no way to estimate how much you will earn or lose, making it difficult to hedge your risks.
Cryptocurrency futures and options are popular trading instruments in the digital asset markets, and both have their own set of unique advantages. Although options are generally less risky, futures offer better liquidity and are more profitable. The decision to trade futures or options depends on the trader’s preferences, such as risk tolerance and available capital. Either way, it’s important to consider certain factors, including your comfort with leverage, your understanding of the instruments, and the need to always do due diligence before trading.
Top 10 Questions About FuturesTrade Crypto Futures: How Much Do They Cost? Take profit and stop loss orders can help traders manage risk. BetteTrading options are simple. To get started, you will first need to activate your options account, transfer funds to your Options Wallet and access the options trading interface to view the full range of options you can trade.
1.2 Click [Register Now] to open your Options account. You will see a tutorial on options trading.
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1.3 After this, you will be redirected to the market view, where all trading options and the order book are displayed.
2.2 Enter the amount of USDT you want to transfer from Spot Wallet to Options Wallet. Click [Download].
3.3 When you select an option to buy or sell, you will see the [trading panel]. Click the arrow to view market details or click the candlestick symbol to switch to the trading interface.
3.5 Enter [Price] and [Quantity] and click [Buy] to make a call or place an option. The premium in USDT will be deducted from your options wallet.
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4.1 You can use the [Positions] tab to track open positions. It will show you the time before the options expire. To transfer this option contract to another dealer, click [Close