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Crypto Futures vs. Options - How Do They Differ?

2021-05-24

Key Takeaways:

  • Crypto futures are derivative products through which buyers and sellers agree to trade at a pre-established price and date. 

  • Crypto options are a form of derivative contract that provides the purchaser with the right to buy or sell an asset at a determined price and date. 

  • The main difference is that crypto futures offer you a large market to trade in, while crypto options offer you a low-risk market.

Crypto futures and options offer a unique set of benefits for traders, which accounts for their increasing growth in the trading world. While futures tend to be more cost-effective, options attract lesser risk. Your choice on either of the two will be based on your risk appetite and liquidity consideration.

Futures and options remain exciting trading instruments for crypto lovers. They allow speculations and calculated risks, thereby increasing the rate at which people trade digital assets. In times past, trading seemed like an exclusive activity for financial experts. However, with instruments like futures and options, trading has become more mainstream and appealing. 

Although the two instruments are both relevant in trading, they are not the same due to many differences and modes of operation.

What Are Crypto Futures?

Suppose you’re looking to minimize volatility while taking advantage of price alterations. Crypto futures will be the smart choice for you. They are derivative products through which buyers and sellers agree to trade at a pre-established price and date. 

The contracts you trade in the futures market do not carry the true value of the cryptocurrency you use. This means that you do not own the underlying cryptocurrency. Since you’re contracting on pre-established terms, a futures contract will not confer on you any economic benefit that ordinarily comes with purchasing cryptos.

Essentially, crypto futures trading rewards your speculation and allows you to trade with ease despite price increases and drops. It’s safe to say futures contracts are similar to placing bets because your predictions determine your overall reward. 

Depending on risk appetite and trading signals, participants can go long or short. You go long when you anticipate a price increase, while you go short when you anticipate a price drop. Regardless of the direction, once the pre-agreed date comes, the contract expires, and the parties settle. 

You will also gain access to leverage in most futures markets. Leverage is a strategy that allows you to trade futures contracts without having to pay upfront the full value of a contract. Traders can borrow the needed capital to finance the contract with a relatively smaller equity stake. 

Types Of Crypto Futures Contract

An overview of the features and products of futures contracts will help you have a deft understanding. There are essentially two product lines for crypto futures that are accessible to users, which include:

  • USD-Margined Futures Contracts - USD-pegged coins are the native currency used in settling contracts of this nature. This futures type supports both delivery and perpetual contracts and offers leverage of up to 125x. By supporting perpetual contracts, participants can hold positions with no expiration date in sight. Read more on USDT-Margined Futures Contracts.

  • Coin-Margined Futures Contracts - Although this product also supports both perpetual and delivery contracts, participants can quote and settle in numerous cryptocurrencies. Perpetual contracts under this product are also quick to maximize profit during bull runs. Read more on Coin-Margined Future Contracts.

What Are Crypto Options?

Crypto options are a form of derivative contract that provides the purchaser with the right to buy or sell an asset at a determined price and date. A “call” option refers to the buying right, while a “put” option connotes the selling right. 

Options operate in a similar manner to other derivatives. It gives traders the avenue to predict and take advantage of price alterations. Traders can also settle in cryptocurrencies, just like futures contracts. 

Participants trade crypto options because it offers them a comparatively low-risk and low-cost solution during trading. This is especially the case when you consider options in relation to perpetual swaps and crypto futures.

Types of Crypto Options

You have two options types to determine your trade, which include:

  • Call - This is your right to buy an underlying asset. 

  • Put - This is your right to sell an underlying asset.

Futures’ Benefits And Differences

Crypto futures and options both have benefits as well as differences. Knowing the benefits and differences informs the choices of traders on which to invest their money and why. 

Cost-Effective

The first thing to note is that crypto futures are cost-efficient. You do not have to pay a premium upfront before the issuance of the contract. This means reduced cost on your contracts without compromising your rewards if your prediction comes through. This is unlike crypto options, where you have to pay a premium to the seller in advance.

Notably, you may have to pay some commissions for crypto futures depending on the exchange with which you trade.

Time Resistance

Futures contracts are ripe for execution only at the predetermined contract price and date. This means that time doesn’t adversely affect the valuation of the contract since there’s no fear of executing at the wrong time. There’s only one time, and that’s the expiry date. 

On the flip side, crypto options have to meet certain criteria for you to actualize their profits. More importantly, as the expiration date draws closer, they become less valuable. So, while futures contracts aren’t adversely affected by time, options are, since the passage of time impacts their value. 

Size

The futures market is relatively old. As such, it has garnered several traders over the years, which now makes the market even larger. Consequently, it often holds higher volumes of traded cryptocurrencies than you will find anywhere else. 

This is not the case with crypto options, which mostly comprise smaller contract units. Due to the expanse of the futures market, big market players and traders tilt towards it and have turned the markets into a highly potent trading ground.

High Liquidity

Since the futures market enjoys a larger space than the options market, it is more liquid and easily accessible than the other. The options market’s liquidity can be low, especially when big trades take a sizable time to settle.

Options’ Benefits and Differences

Reduced Loss and Low Risk

Remember, futures contracts are valued beforehand and set for execution at a predetermined date. As such, they are riskier because there’s no way to evaluate how much you’ll make or lose. This makes it challenging to hedge your risks. 

However, with options, you can evaluate your loss beforehand, especially with long options where you’re aware of the premium prior to entering the trade. Long options positions are generally less risky than futures and short options positions because they give the trader an idea of the possible loss. 

Execution Freedom

An options contract confers a right on the buyer and not an obligation. This means that a buyer has the will to buy the underlying asset when it’s most profitable to do so. Such an advantage doesn’t exist with futures contracts. 

Purchasing under a futures contract is an obligation.

Great Flexibility

The obligation to exercise doesn’t include long options, indicating the flexibility that comes with this contract type. This is in contrast to physically settled futures, which require exercising at the expiration date.

How To Trade Crypto Futures Contracts

The best way to enjoy futures trading is by using exchanges with simple and easy-to-use interfaces. Trading crypto futures on Binance Futures makes the process seamless and convenient. The futures market offers you the opportunity to take advantage of market movements by going short or long in your contracts. You also have up to 125x leverage to expand your rewards in a volatile market. 

You can trade futures contracts on Binance Futures with the following steps:

  1. Start by creating your futures account. After that, deposit the margin into your futures account. You may choose between USDT, BUSD, or any supported cryptocurrency in your account to be used as a margin.

  2. Based on your preference, determine your leverage level. Consider the underlying asset’s volatility when choosing your leverage level.

  3. Following that, you will choose the order form you intend to engage, whether buy or sell. Remember that “buy” relates to when you’re predicting an increase in price while “sell” has to do with anticipated decline.

  4. Select the number of contracts you intend to own.

Futures contracts allow you to profit whether price decreases or increases, but your prediction must be right. 

Suppose you’re going on long with a contract size of 1 BTC, you can set your entry price at $40,000 and exit price at $45,000, leaving you with a profit of $5,000.

If you were going short, it's the other way round. That is, the entry point at $40,000, while the exit price will be $35,000. But since prices moved up to $45,000, you incur a loss of $5,000. 

So, essentially, you can gain from the two ways an asset can possibly move if you are able to anticipate the direction of the trend.

How To Trade Crypto Options Contracts

Trading options on Binance is an easy process. You will need to activate your futures account and click on the Trades tab to choose “Options.”

  1. Ensure to fund your futures wallet. You can do that by transferring funds from your spot wallet to your futures account.

  2. For options, you can choose different time periods, such as 10-minute, 30, 1 hour, 8, and 1 day. These periods represent the expiration date of your trade.

  3. Remember you have the put and call option, where call deals with an increase in anticipation, while put deals with a decrease. You can choose either of the two based on your preference and analysis.

  4. Input the contract size

  5. When you’re done, click to “buy call”, after which the premium will be deducted in USDT from your futures wallet.

  6. You can use the “Positions” tab to monitor your open positions. It will also reflect the amount of time you have before the expiry time. So, suppose you want out, you can click to settle and close the position.

Conclusion

Trading crypto futures or options often depends on your preferences. However, an important factor to consider in trading is how to maximize profits. 

Crypto futures offer you a large market to trade in, while crypto options offer you a low-risk market. This makes it important that your predictions are based on adequate analysis. While you cannot determine market flow and volatility, you can mitigate your loss.

Read the following helpful articles for more information about Binance Futures:

Disclaimer: Crypto assets are volatile products with a high risk of losing money quickly. Prices can fluctuate significantly on any given day. Due to these price fluctuations, your holdings may significantly increase or decrease in value at any given moment, which can result in a loss of all the capital you have invested in a transaction.

Therefore, you should not trade or invest money you cannot afford to lose. It is crucial that you fully understand the risks involved before deciding to trade with us in light of your financial resources, level of experience, and risk appetite. If required, you should seek advice from an independent financial advisor. The actual returns and losses experienced by you will vary depending on many factors, including, but not limited to, market behavior, market movement, and your trade size. Past performance is not a guide to future performance. The value of your investments may go up or down. Learn more here