April 18, 2024

What are the Differences and Similarities Among Crypto Options and Futures?

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Derivatives are a type of financial instrument whose value is tied to an underlying asset (gold, oil or digital currencies), as well as providing exposure to bitcoin as a cryptocurrency. Options and Futures are two types of derivatives that are used by investors only to know or predict their prices in the market, and at the same time, investors diversify their portfolios to reduce all the risk involved in them. 

If we compare futures contracts and options, the same trading fundamentals are observed, which are employed in different forms for trading strategies, given the major differences in the different instruments:

What Are Crypto Options?

Like crypto futures contracts, the value of the options contract is tied to the asset. Options are a derivative and allow traders to buy and sell an asset at a pre-established price on a given date. However, the holder of the option contract cannot exercise any option to sell or buy the underlying asset after the expiry of the option contract. With crypto, the option holder is not provided with the obligation to buy or sell the asset on the date and for a predetermined price. When it comes to options, traders generally need to understand their risks to minimize losses and there are some potential liquidations associated with futures contracts that allow them to be avoided. There are several types of options, which include options on calls and puts. A same call is an option which gives an option to the trader the to buy the asset on a specific date, and on the other hand put, the option is one that we sell the asset on a specific date.

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Benefits of Crypto Options

  • Significance of Risk Management: The risk factor provides you with the option for outright ownership and future contracts. Moreover, you will have the option to choose not to exercise the contract if the market is not going in your favour. Well in that case the premium amount will be lost as compared to the total purchase amount. 
  • Available with Liquidity: Product markets always remain demanding and avail more liquidity as compared to the standard crypto markets. However, the liquidity factor makes it easier and faster to accomplish the trades. 

Key Similarities of Futures vs Option

Instruments for hedging

The underlying asset isn’t really necessary to own when using choices or futures contracts, which are both derivative instruments. This approach enables users to obtain exposure to virtual currencies in the situation of digital assets sans having to buy and keep them themselves.

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Futures contracts and Options are hedging products that investors can use. A peril management method hedging is utilised to minimise or completely prevent financial losses.

Differences between Crypto Options and Futures

Responsibilities and rights

These are two types of instruments, the main difference between which is the method of execution. Wherein one option is given to the buyer and it is given not to exercise the contract, on the other hand, it is against the market condition. Also, the contract must be executed to the end, regardless of market conditions for the holder of the futures contract.

Potential Risks

Options traders have no choice but to exercise multiple contracts, and losses are limited to the premium paid for the contract. Through this, the buyers make a lot of profit as the loss in this is covered at a premium, even if the underlying asset is moving higher. 

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Trading options would always be a lucrative opportunity to diversify your cryptocurrency account of yours and also be able to manage the risk factor under some specific markets. However, the crypto market expanded with fully loaded features of traditional finance and thus the counting of traders went on increasing towards trading options. However, we cannot ignore the fact that this could be risky in case of not being careful with your investment plans. 

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