What are the differences between crypto options trading and futures trading? You can avail of a lot of benefits and perks through crypto futures and options trading, two of the most commonly chosen trading options.
Both these are quite exciting and intriguing trading options which will allow you to increase the rate at which you exchange crypto assets since both allow you to calculate the amount of risks involved and make proper speculations accordingly.
However, in spite of these similarities, these tools are not created equal.
If you do not know the differences between crypto options trading and futures trading you may feel, just like most of those traders who are new to the crypto space, that these forms of trades are designed and meant for the financial experts.
However, allowing you to speculate and calculate the risks, in reality, these two exciting forms of trades can be followed by anyone.
Therefore, you will need to know the differences between them in order to choose the right trading alternative for you.
Do not fret if you do not know about these differences because you are in the right place eventually.
This article will let you know about the significant differences between the two and how exactly they work.
Contents
Crypto Options Trading vs Futures Trading – The Differences
There are some major differences between crypto futures and options trading such as in futures trading the contract holder needs to take the ownership of crypto assets underlying it.
Also, the price of the futures is determined by the market conditions.
And, the price for such a purchase will never fall below $0 since the market experiences less volatile price changes.
On the other hand, in options trading the trader has the right to purchase the underlying asset but is not obligated to do so.
As for prices of the future purchases, it is mentioned in the contract.
Here, the value of the underlying asset may decline quickly over time and change more widely so much that it may even fall below $0.
Apart from these there are lots of other differences that are also good to know for any crypto trader and investor.
Here you will find all those mentioned.
Fundamentals
Cryptocurrency options trading is a specific type of derivative contract. In this form of trading you will get the right to buy or sell a particular crypto asset at a specific date and price.
This buying right is called the ‘Call’ and the selling right is known as ‘Put.’ This is a low-risk and low-cost alternative especially when you deal with specific options trading such as crypto futures and perpetual swaps.
On the other hand, crypto futures trading are the ones that will allow you to take the maximum advantages due to the chances in price of the crypto assets and at the same time reduce the volatility.
The crypto futures trading also deals with derivative products and the buyers and sellers of a crypto asset agree to trade them at a fixed date and at a predetermined price.
Transaction
In the case of futures trading, a transaction is mandatory. According to the agreement, both the buyers and sellers in a contract are obligated to make a transaction on the date and at the prices stated in the contract.
On the other hand, in crypto options trading a buyer is not obligated to make any transaction. In fact, it is optional, and hence the name.
However, the seller is obligated to transact when the buyer chooses to do so and the price at which such transactions are to be made is mentioned in the options trading contract itself.
And, there is no specific date to make such a transaction in options trading. It can be done any day prior to the date of expiry of the contract.
Working Process
Much similar to the working process of the other derivatives, crypto options trading will give you a chance to speculate and make profits from the changes in price of the crypto coins. You can settle your positions in this type of trade just as you can do with futures contracts.
However, in futures trading, the actual value of the crypto coin in use is not reflected. This means that you do not own the crypto coin you buy.
This is because futures trading is all about an agreement of the predetermined terms and therefore you will not be able to enjoy the benefits that are usually provided to you when you buy crypto coins physically.
Cost
When it comes to crypto futures trading, it offers several benefits that are different from crypto options trading.
For example, it is quite an inexpensive alternative since you do not need to pay any premium before the issuance of the contract. This will lower the cost of your contract but will not compromise the benefits offered if your speculation is correct.
On the other hand, when you deal with crypto options trading, you will need to pay a premium upfront to the seller.
And, in addition to that, you may also need to pay commissions on sales depending on the requirements of the particular exchange you use to trade crypto futures. This makes crypto options trading an expensive alternative as compared to futures trading.
Time Resistance
The good thing about the crypto futures trading is that it is not affected much by the passage of time. This means that time will not change the value of the contract because the value of the underlying assets will be tracked closely up to the date of its expiration.
On the other hand, in case of crypto options trading, it is affected by time because it affects the value of the underlying assets. Therefore, it is required to match the prediction with the time and conditions precisely in order to gain handsome profits.
More importantly, as and when the contract approaches its time of expiration, the contracts seem to become less valuable.
Size
Another significant difference between options trading and crypto futures trading is in their size. Typically, the futures market has been around for a longer time in the market and therefore has a much longer history.
As a consequence, it has driven in more people over the years which have expanded its market peripheries even further. As a result, it commonly retains larger volumes of crypto coins traded in comparison to any other exchange.
In contrast, the crypto options trading style is relatively new and is often made up of pretty small units of contract. However, its rise, expansion and effectiveness are largely due to the rise of the futures market.
Liquidity
You will find liquidity in abundance in the crypto futures trading market. This is the reason it attracts more users and offers easy accessibility to them.
On the other hand, the crypto options market is not as liquid as the futures market simply because it does not operate in as broad a space as the futures market.
Therefore, liquidity and accessibility in the options market are both scarce since the large trades especially take a much longer time to settle.
Risks and Losses
The future market is riskier and therefore you will need to schedule your futures contracts and value them more precisely and well in advance than the defined time.
This is especially because the users are unable to predict how much money they can earn or lose in this process, making it much a difficult and riskier crypto trading alternative.
However, with options trading, on the other hand, you will find it much easier to guess your loss well ahead of time. You will also be able to know the premium when you choose a long option even before you enter into a deal.
Flexibility
Options trading allows the users to have more flexibility. In fact, the American-style options, in particular, will allow you to exercise your options at any point in time before the actual expiration of the contract.
This means that the users of this style of options trading can take the maximum advantage of the opportunities provided to them by the market much faster and make a profit without needing to worry about any time constraints.
On the other hand, in crypto futures trading which lacks such adaptability cannot be settled physically before the expiration of the date. This makes this type of trading less flexible.
Trading Methods
You can enjoy the benefits offered by the crypto futures contracts in the best possible way if you trade on over crypto exchanges that come with an interface that is simple and easy to use.
For example, if you choose the Binance platform to trade your crypto futures, you will find the process to be much more convenient and seamless even if you go long or short on your contracts.
The steps to follow to trade your crypto futures which will allow you to make profits no matter whether the price of crypto assets increase or decrease are:
- Creating your futures account
- Depositing the margin into it with the supported cryptocurrency
- Determining your leverage level by considering the volatility of the underlying asset
- Choosing whether you want to buy or sell in the order form and
- Selecting the number of contracts you want to buy.
Remember, buying here refers to predicting a rise in the price of the underlying asset in the contract and selling refers to predicting a decline in it.
On the other hand, when you want to make a crypto options trade, which is also an easy process, all you need to do is download the app of the exchange you want to trace on, for example Binance. When you are done with the downloading of the app, you will have to:
- Activate the futures account
- Click on the Trades tab
- Choose ‘Options’
- Fund the futures wallet by transferring money from your spot wallet
- Choose the time periods from 10-minute, 30 minutes, 1 hour, 8 hours and one day as the expiration date of the trade contract and
- Determine the size of the contract
- Click on ‘Buy call.’
Remember, in this form of crypto trading you will need to choose between the Put and Call options which refer to buying the underlying asset of the contract at expiration or selling it respectively. It all depends on your analysis as well as your preferences.
Tax Consequences
When it comes to futures trading, the tax treatment and consequences is much less complicated and more favorable especially for the swing traders and scalpers.
On the other hand, the tax treatment for options trading is not only more complicated but it also takes into account the total time period of the particular trade.
If you hold your position for less than a year, you will be taxed at the rate of short term capital gains and anything over that will be considered to be your long term capital gain and will be taxed at a different rate. In addition to that, it also considers whether the trader was simply a holder of Puts and Calls or was a writer.
Profitability
Though both these trading forms offer unlimited profit potential, the future trading option provides a linear payoff.
This means that you can make profits while trading your crypto futures contracts only when the price moves in the direction in favor of your trade. If it moves against your trade, you incur a loss.
On the other hand, an option trading offers profits in a non-linear pattern. This means that you are allowed to use diverse strategies while trading in order to make profits irrespective of the fact that the crypto market is moving upwards, downwards, or horizontally sideways.
Therefore, in crypto options trading you will get to trade in diverse scenarios which will enhance your probability to make profits.
Best for
Option trading is a good option for those who are not used to trading impulsively. This is because the premium is quite low for an opening an option position out of the money as compared to the initial margin on opening futures positions which can be a double edged sword.
The less amount of capital requirement can make most people trade impulsively, and if they do not follow the rules or a proper trading strategy, they may tend to over-leverage their investment portfolios. This will result in taking a high amount of risk which may blow up their account potentially.
On the other hand, trading crypto futures is best suited for the traders with a strong heart and financial capacity.
This is because futures trading needs a high amount of leverage and this can be really disastrous if there is any one wild price move back and forth in the wrong direction.
Therefore, this is a good option to choose if you are quite disciplined and have a high risk tolerance.
In addition to that, you should also follow a better and proper risk management practice, and be unemotional. If you are not, it is better to stick to options trading for the time till you acquire these qualities.
Which is Better – Crypto Options Trading or Futures Trading?
Trading crypto futures or options is not easy and needs a lot of attention and caution so that you can maximize your profit, no matter whichever trading option you choose.
None of this is better than the other since both come with their characteristic pros, cons, and differences.
However, there are a few similarities between these two forms of crypto trading such as:
- Both derive value from the assets underlying the contract and therefore are called derivatives
- Both are equally popular among the retail traders and
- Both offer enormous profit potentials.
However, if you are new to crypto trading, you should be one among the two and master it and then, when you understand the crypto market well, you can build and follow a strategy that works best for you and is profitable and switch over to the other.
Therefore, it is your preferences and trading style that you should consider since these are the major factors that will determine which trading option should choose between them.
While dealing with the crypto options trading you will experience a lower amount of risk as compared to crypto futures trading.
Crypto futures trading is however much more cost effective in comparison to crypto options trading.
Well, this is not enough information for you to know.
While choosing one between these two crypto trading forms you will need to adequate and proper analysis since you cannot always determine volatility and market flow but will always need to mitigate the chances of incurring losses as much as possible.
Therefore, apart from knowing the differences between crypto futures trading and options trading, here are a few other facts and information that you should also need to know for a more effective and productive trading with crypto.
When it comes to choosing one alternative between crypto futures trading and options trading, you should do so on the basis of your risk appetite.
Also, you will need to consider the liquidity needed and provided by the crypto exchange platform.
There are generally two major forms of crypto futures contracts that you can choose while trading and it is better for you to know these. These are as follows:
- USD-Margined Futures Contracts – These are the contracts that deal with USD-pegged crypto coins. The US Dollar is the native currency used to settle the contract whether it is delivery or perpetual contract. In this form of crypto futures trading you are allowed to hold your positions without any expiration date when you support perpetual contracts.
- Coin-Margined Futures Contracts – These are futures contracts wherein the users can quote and settle in a wide range of crypto coins. This form of crypto futures trading offers both deliverable and perpetual contracts. However, the perpetual contracts in this form of trading are comparatively quicker to optimize profit while the market experiences a Bull Run.
Typically, when you deal with crypto futures, you will be rewarded for your speculations made in the prices of the crypto assets in a market that is independent of any fluctuations.
This will ease your trade. Putting it in a different way, it can be said that trading crypto futures contracts is similar to gambling because the outcome of it is typically based on your expectations.
In this form of trading, you are allowed to go either long or short on your positions depending on the trading signals and your risk appetite.
If you anticipate a rise in prices of the crypto coins in the future, you can go long, and, on the other hand, when you think that there will be a fall in price of a crypto coin in the near future, you can go short.
The unique aspect of this form of trade is that the contract will expire on the date predetermined and irrespective of the outcome, the parties involved in the contract will settle.
When you consider the futures markets, most of these markets will allow you to have access to leverage as well.
Leverage is a specific approach for trading futures contracts in which you do not have to pay for the entire contract value upfront.
You are allowed to borrow the necessary funds in this form of trading in order to fund a contract with lesser equity ownership.
In futures contracts you are allowed to go long or short and, as said earlier, you can make profits whether there is a price increase or decrease depending on the position you have chosen.
For example, if you go long on one Bitcoin with a contract and set your entry and exit price at $50,000 and $55,000 respectively, you make a profit of $5,000.
On the other hand, if you go short on your position for the same with the entry point and exit price being $50,000 and $45,000 respectively, then also you make a profit of $5,000.
Therefore, if you speculate precisely you can make profits in both the directions in which the price of the coin moves.
If you choose to go with crypto options trading you must remember that the premium you will need to pay will be deducted from your futures wallet in USDT.
Also, in this case, you will be able to use the ‘Positions’ tab on the interface which will allow you to monitor all the open positions of your trade.
This will also let you know the specific amount of time remaining before the expiration of your contract.
If you want to move out and close your position all you have to do is click to settle.
Remember that, in options trading, you will be given a right according to the contract and not a duty as it is in the case of futures contracts.
The options contract refers to your willingness to buy the asset underlying the contract when it seems to be most profitable.
On the other hand, in the case of crypto futures trading you are not provided with any such benefits.
This is because according to a futures contract, purchasing is a legal requirement.
To wrap up, it can be said that, though both crypto options and futures trading are financial contracts that you can use to hypothesize the price movements of the market, they primarily differ in the obligations passed onto the eventual buyer of the contract.
In the case of futures contracts, you will need to settle your trade in full. On the other hand, in options trading you do not need to do so and choose to pay the margin or deposit.
Conclusion
Though choosing one between crypto futures and options trading usually depends on the preferences of the trader, you can maximize your profits if you only know the differences between the two. Well, this article tells you just about that.
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