Crypto Futures and Options: A simple introduction (2024)

Crypto derivatives are financial contracts between multiple parties where value is derived from a base asset. In simple terms, it is a commitment to purchase or sell a specified asset, such as stocks or cryptocurrencies, at a predetermined price at a future date. Derivatives have no inherent or direct value in and of themselves, and the value of a derivative contract depends solely on the underlying cryptocurrency’s predicted future price movements.

Most crypto exchanges, including Phemex, offer derivative contract trading. The knowledge required to effectively participate in these marketplaces is significantly more advanced. However, the intricacy of these financial instruments allows for far greater trading flexibility and control.

Futures, options, and perpetual contracts are the most often traded derivatives in the cryptocurrency sector. In this article we will mainly focus on futures and options, how they differ from each other, and their similarities.

What are Crypto Futures Trading?

Crypto futures contracts indicate the value of a certain cryptocurrency at a given point in time. The holder of a typical futures contract is obligated to acquire or trade the underlying asset at the contract value at expiration. The precise settlement date differentiates futures contracts from other types of crypto derivatives.

What are Options Contract?

Options contracts, like bitcoin futures contracts, have a value that is linked to the underlying asset. Options contracts allow investors to purchase or sell an asset on some future date at an agreed-upon price. Unlike futures, however, option contract holders have the choice to buy or sell the asset that underlies it at expiration. They give the holder the right, but not the duty, to buy or sell an asset at a specific date and price. Crypto options trading often allows traders to control their financial losses and avoid the risk of liquidation. The options buyer usually pays an additional premium for this right.

Futures vs Options: Similarities & Differences

Similarities

• Derivative Instrument: Futures contracts and options are both derivatives that do not require holding of the underlying asset and can be used as hedging tools. Hedging is a type of risk management approach that is used to minimize or eradicate revenue losses.
• Leverage: In addition, through leverage, traders can obtain access to the underlying asset at just a portion of the expense associated with both forms of derivatives contracts. This allows traders to buy or sell a large contract with a small amount of capital.

Differences

• Fee: One of the key distinctions between these two derivatives is their fee structure. Buyers of options must pay an upfront cost, called as a premium, for the seller at the point of purchase. You can open a trade in a futures contract without paying any fees in advance. Depending on the exchange, you will most likely have to pay commissions such as trading fees.
• Risk Management: As mentioned before, options traders’ losses are limited to the premium they paid for the contract because they have the option not to exercise their contracts. The maximum loss is capped at the fixed premium, regardless of how much the underlying asset changes. On the other hand, futures contracts have liquidation risks due to leveraged positions’ propensity for violent price movements, which might easily wipe out a trader’s initial investment. When your cash level is insufficient to cover the open position’s margin requirements, forced liquidation may occur.

Conclusion

In the market for digital assets, cryptocurrency futures and options are becoming very common trading tools with their distinct pros and cons. Derivatives trading carries high risks, and you always need to do your own research before the investment.