As the crypto market expands, the range of derivative products also increases. Today let’s join FMCPAY to explore the key similarities and differences between crypto futures vs crypto options – two of the most widely used derivatives in the crypto world.
1. What are Crypto Futures?
Futures trading involves a contract between a buyer and a seller to exchange a specific cryptocurrency at a predetermined price on a set future date. In a normal futures contract, the holder is obligated to buy or sell the asset at the contracted price upon expiration.
Traders may experience gain or loss depending on their positions (long or short) and the movement of futures prices. If a trader believes the asset’s price will rise, he can choose a long position. Or if he expects the price to fall, he can choose a short position. Settlements are generally made in USD or another agreed-upon currency.
For instance, if a trader takes a long position by purchasing a Bitcoin futures contract at $60,000 and the price rises to $75,000 by the contract’s expiration, the trader earns $15,000 in profit. Conversely, if the price falls to $40,000, the trader faces a $20,000 loss.
In comparing crypto futures vs crypto options, it’s essential to note that futures contracts involve buying/selling obligations at expiry, unlike the optionality found in options contracts. Liquidation occurs when the market moves against a trader’s prediction, leading to the forced closure of their position.
2. What are Crypto Options?
Options are another form of derivative contract in the world of crypto trading, distinct from futures. In the crypto futures vs crypto options comparison, futures often obligate you to buy/sell the asset at a specific date, while options grant you the right to choose to make the transaction or not.
There are several types of crypto options:
- Call Options: Allow you to buy an asset on the expiration date.
- Put Options: Allow you to sell an asset on the expiration date.
- American Options: Allow you to sell before the contract’s expiration date.
- European Options: Must be exercised on the exact expiration date.
A notable distinction between crypto futures vs crypto options is that options traders must pay a fee to acquire the contract. For instance, if an option costs $600, this fee is required in addition to the asset’s price. Regardless of whether the option is exercised or not, the $600 fee is non-refundable.
Consider this example: If you purchase a call option for Bitcoin at $60,000 and the price drops to $30,000, you can choose not to fulfill the contract and won’t suffer the $30,000 loss. However, since the $600 fee is non-refundable, your total loss would be $600.
Read more: Over 18000 Bitcoin options to expire, real panic selloff isn’t even here yet
3. Crypto Futures vs Crypto Options: Key Similarities
When comparing crypto futures vs crypto options, it’s important to recognize the common features that make these derivatives attractive to traders. Despite their differences, both offer unique benefits and play significant roles in the cryptocurrency trading landscape.
3.1 Derivatives
Both crypto futures vs crypto options are types of derivatives. This means that their value is derived from the underlying cryptocurrency asset. Like other derivatives, they enable traders to speculate on the price movements of cryptocurrencies without directly owning the assets themselves.
When discussing crypto spot vs crypto futures, it’s essential to understand that both futures and options provide profit opportunities based on price changes in digital assets.
3.2 Leveraged Contracts
Both crypto futures vs crypto options offer leveraged trading opportunities. Leverage allows traders to control a larger position with a relatively small amount of capital. This means that potential returns can be significantly higher compared to the initial investment.
However, leverage also amplifies risks, which is why it’s crucial to implement risk management strategies to mitigate potential downsides associated with these high-stakes trading tools.
3.3 Hedging Instruments
Another similarity between crypto futures vs crypto options is their use as hedging instruments. Both types of contracts can be used to mitigate risk in a portfolio.
For example, if an investor buys a cryptocurrency and anticipates potential price declines, they might use options to hedge against this risk by purchasing a put option at a set strike price. Similarly, futures contracts can lock in prices for future purchases, protecting against price fluctuations.
In both cases, the goal is to minimize potential losses through strategic financial maneuvers, highlighting how both derivatives play a role in risk management within the cryptocurrency market.
4. Crypto Futures vs Crypto Options: Key Differences
When comparing crypto futures vs crypto options, it’s important to understand the key differences that define how each instrument operates and impacts your trading strategy.
4.1. Rights and Obligations
The main difference between crypto futures vs crypto options lies in the execution requirements. With crypto options, buyers have the right but not the obligation to exercise their contract. If market conditions are unfavorable, they can choose not to execute, thus limiting their risk to the premium paid.
Conversely, crypto futures require the holder to execute the contract at expiry, regardless of market conditions. This obligation can result in significant financial consequences if the market moves against the trader’s position.
4.2. Time Decay
Time decay is a critical factor in crypto futures vs crypto options comparison. Options contracts lose value as they approach their expiration date, a phenomenon known as time decay. This accelerated decline in value means that the closer the option gets to expiry, the less time remains to profit from it.
In contrast, futures contracts are not affected by time decay. Their value remains constant until the contract expires, which can be advantageous for traders who prefer a more stable valuation over time.
4.3. Cost Structures
Another distinction in crypto futures vs crypto options is their cost structure. Options require an upfront payment of a premium to acquire the contract. This fee is the cost of entry, and it limits the trader’s risk to the premium paid.
On the other hand, futures contracts do not have an upfront fee but may involve other costs such as trading commissions and funding rates, which can vary by exchange. While futures do not require an initial premium, these ongoing costs must be considered when evaluating the overall expense of trading.
4.4. Potential Risks
Finally, the risk profiles of crypto futures vs crypto options vary significantly. Understanding these risks is crucial for making informed decisions in the crypto derivatives market. Options traders face a maximum loss limited to the premium paid, providing a clear risk cap.
Futures trading, however, involves higher risks due to leverage, with the potential for significant losses if the market moves unfavorably. Liquidation risk is also a factor, as futures traders must meet margin requirements to avoid forced liquidation, which can deplete their initial investment quickly.
Read more: Crypto Spot vs Crypto Futures | Pros & Cons for Investors
Conclusion
Both crypto futures vs crypto options have become widely popular trading instruments in the digital asset markets. While options tend to be less risky, futures offer better liquidity and are more cost-effective.
The decision to choose between crypto futures vs crypto options depends on your preferences. In any case, always conduct an in-depth analysis before you trade.
Remember to stay tuned with FMCPAY for more insightful articles about the crypto realm!