Crypto Futures And Options Are Two Popular Trading Tools
Futures and options are two of the most popular yet useful derivatives trading contracts in the crypto world. With futures and options, crypto trading has become more mainstream and appealing as these contracts allow traders to indirectly invest in the crypto market while hedging the risks but ensuring gains. Both take into consideration the speculation and prediction of cryptocurrency prices. But are they the same? The answer is no.
Futures Vs Options – What Exactly Are They?
Before we jump into the differences between futures Vs options, it is important to know what exactly futures and options are.
What are Crypto Futures?
Cryptocurrency futures are contracts to bet on the future price of a specific cryptocurrency. A futures contract is a type of derivative trading product. In layman’s terms, it is a contract between two parties to buy or sell an asset at a predetermined price on a predetermined date.
Now, if the price of BTC exceeds $25,000 at the end of three months, you will profit by selling the remaining three bitcoins that are not included in the futures contract. If it drops below $20,000, you will lose money if you sell the remaining three bitcoins. However, you can still sell that one bitcoin for $25,000 and fulfill the futures contract.
What are Crypto Options?
Unlike futures contracts, which bind contract holders to buy or sell crypto on a specific date in the future, options are not legally binding. Options are a type of derivative contract as well. These contracts give the buyer the right to buy or sell the underlying asset at a set price before the contract expires. Crypto options contracts are of two types:
- Call options: The right to buy the underlying crypto asset
- Put options: The right to sell the underlying crypto asset
Therefore, we can consider options contracts as opportunities to buy or sell. The fees you pay for purchasing a call or put option are referred to as ‘Premium.’ The premium is simply the strike price you agree to pay to the seller. It will remain unchanged until the contract expires.
Now let’s take an example. Suppose you buy a BTC call option at $5,000. The options contract expires in 90 days. You pay a premium of $600. This options contract allows you to buy BTC at $5,000 at any point in the next ninety days. If Bitcoin’s price rises to $8,000, you can exercise the contract and take your $3,000 profit. However, you won’t get the $600 premium back. Now, if you bought a BTC put option with the same conditions, then you can sell the BTC at $5,000 anytime in the next 90 days. Even if you choose not to execute the options contract, you will not get any refund for the premium.
Futures Vs Options – 4 Key Differences
The key distinction you need to know for the futures vs options debate is that you are not required to exercise options. Futures, on the other hand, do not provide you with that option. Let’s now have a look at the 4 main differences between futures vs options.
The first difference to mention is that crypto futures are more cost-effective than crypto options. You are not required to pay a premium before the futures contract is issued. Crypto options require you to pay a premium to the seller in advance. Furthermore, once paid, the premium cannot be refunded, even if you choose not to execute the options contract.
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Crypto options contracts are less risky than crypto futures contracts. Even if the security moves against the crypto futures contract holder, they are obligated to buy on a future date. In this case, the buyer of a crypto options contract has an advantage. If the underlying asset value falls below the agreed-upon price, the buyer has the option to not exercise the contract.
Crypto futures contracts are the purest form of derivative asset trading. The crypto futures market is much larger than the options market. These contracts have a higher level of liquidity than crypto options contracts. This means that futures contracts are better suited to day trading. The crypto options market may be much less liquid. There is usually less slippage in crypto futures than in crypto options. Furthermore, because crypto futures contracts move faster, they are easier to enter and exit.
Freedom of Execution
As stated earlier, a crypto futures contract is an agreement between two parties to buy or sell a cryptocurrency at a specified price in the future. In this case, the buyer is obligated to purchase the asset on the specified future date. A buyer has the right, but not the obligation, to make the purchase whenever he wants before the predetermined day in a crypto options contract. This gives a crypto options holder the right to purchase the asset whenever the underlying markets are performing well.
Cryptocurrencies are extremely volatile assets. This translates into volatility for futures vs options because the underlying asset prices will follow the ups and downs of the crypto market. Crypto futures provide a large market to trade in, whereas crypto options provide a low-risk market.
Therefore, to get the best of both worlds, it is critical that your predictions are founded on thorough research. Further, you must trade on a reputable cryptocurrency trading platform like Delta Exchange.