Cryptocurrency is gradually leading the traditional financial industry to create a permissionless, all-encompassing financial system, and one of the important financial products that has evolved is cryptocurrency options and futures. These are derivative products used by cryptocurrencies to increase portfolio stability and yield, providing investors with another financial option. This article will introduce cryptocurrency options and futures, and the difference between them.
Cryptocurrency options are trading tools for hedging risks and predicting cryptocurrency prices. As the name suggests, you have the "right" to choose whether to exercise the contract. It is a contract that gives cryptocurrency investors the right, but not the obligation, to sell or buy the underlying cryptocurrency asset. Cryptocurrency options are traded at a fixed rate and are valid for a certain period of time. It is a kind of protection for investors against price fluctuations. You do not necessarily need to own the cryptocurrency asset before trading cryptocurrency options, so it is also called uncovered/unprotected/naked call option. You can buy options without owning the asset, or sell the asset at a later date.
The following are common terms used in cryptocurrency options trading:
● Put Option : This is a contract that gives you the right to sell a crypto asset at a fixed price within a certain period of time. You can buy a put option when there is a speculative drop in the price of the crypto asset in the future.
● Call Option : This is similar to a put option, the only difference is that it gives investors the right to buy, not sell. It is a contract that gives you the right to choose whether to buy a cryptocurrency asset at a fixed price within a certain period of time. If you estimate that the cryptocurrency asset has speculative growth in the future, you can buy a call option.
● Strike Price : This is a term used to agree on a fixed price in a call option. The strike price is a pre-set price agreed upon between investors to buy or sell an option.
● Spot Price : This is the current value/price of the crypto asset. It may be higher or lower than the strike price, depending on the buying power of the market. When the spot price is lower than the strike price, the put option will be profitable; when the spot price is higher than the strike price, it is a profitable call option.
● Expiration date : This is the agreed expiration date of the option contract. The option contract can only be executed within this time frame. If it exceeds this time, it will become invalid.
Cryptocurrency futures are a trading instrument where a buyer and a seller predetermine a price to buy/sell a crypto asset at a future date. In other words, it is a contract where two parties agree to trade at a certain price on a certain day. Cryptocurrency futures contracts help buyers plan and predict prices. On the other hand, it provides crypto asset holders with protection against risks, price fluctuations, and market uncertainties.
There are two types of cryptocurrency futures contracts:
● Long Contract : When you think the value of the contract or the price of the currency will rise in the future, you can choose to go long on the contract. If the price of the currency does rise in the future, you can get several times the profit.
● Put / Short Contract : When you think the value of the contract or the price of the currency will fall in the future, you can choose to short the contract. If the price of the currency really falls in the future, you can also make money from it.
The Difference Between Cryptocurrency Options and Futures
These two crypto derivatives are mainly used to hedge the risks of cryptocurrency investments and are often applied to different investment strategies. Although they have similar uses, they have obvious differences in trading and operation.
- Rights vs Obligations
One of the main differences is the execution model. If the price of the cryptocurrency moves against the investor, the option buyer can decide not to exercise his right. In contrast, the futures buyer must execute the contract regardless of the price of the cryptocurrency. Therefore, investors in crypto options have more flexibility than those in crypto futures.
- Time value
Time does not affect the value of crypto contracts, or has no negative impact. Crypto futures contracts actually repeat the movement of the crypto asset's value until the expiration date. Crypto options, on the other hand, must meet certain requirements in order to be profitable. As the expiration date approaches, the value of the option decreases. Therefore, time does not have a negative impact on futures contracts, but it can affect the value of options.
- Liquidity
Since the crypto futures market is larger than the options market, it provides higher liquidity and easier access. The crypto options market may have lower liquidity, especially large trades may take longer to complete and settle.
- Option Premium
Investors do not need to pay a premium or option premium before purchasing a crypto contract. This means that when making cryptocurrency price predictions, the cost of the contract can be reduced without paying fees. In contrast, when trading cryptocurrency options, the buyer of the contract pays the option premium and the seller receives the option premium. It is worth noting that whether you are trading crypto futures or options, you must also pay the platform's transaction fee to the exchange.
- Potential risks and rewards
Theoretically, the profits and losses of both buyers and sellers of crypto futures contracts are unlimited. Buyers and sellers of crypto options contracts face different risks and rewards: the buyer's risk is the loss of the option premium paid, and the opportunity to obtain unlimited returns; the seller theoretically bears unlimited risks, and his return is the option premium.
Summarize
Cryptocurrency options and futures are both derivative trading tools that can minimize portfolio risk and predict price trends. However, there are differences in trading and execution between the two, and there are also certain risks. You can learn more about these two investment products so that you can use them more flexibly in the future and improve the performance of your crypto portfolio.
