Options and futures are derivatives that derive their value from an underlying asset.
Crypto futures are contracts to buy or sell an asset at a set price and date. Traders must fulfill their obligations at expiry. Crypto options are contracts that give traders the right to buy or sell an asset at a set price and date. Traders can choose not to exercise their rights at expiry.
Derivatives are financial instruments that track the value of an underlying asset, such as a cryptocurrency like bitcoin. Derivatives let investors speculate on market prices, hedge risks, and diversify their portfolios.
Options and futures are two types of derivatives that have similar trading principles, but different trading strategies. Here are the key differences between them.
What Are Crypto Futures?
Crypto futures are agreements to buy or sell a specific cryptocurrency at a fixed price and time. Traders must buy or sell the asset at the contract price at expiry. Traders can profit or lose depending on their positions (long or short) and futures price. A long position means expecting a price increase, while a short position means expecting a price decrease. For example, if bitcoin’s current price is $10,000, you can buy (long) or sell (short) a futures contract based on your price prediction.
If you buy this contract and bitcoin’s price rises to $20,000 by expiry, you make $10,000 in profit. But if the price falls to $5,000 by expiry, you lose $5,000. Liquidation happens when you wrongly predict the market and your position is closed. Binance Futures lets traders trade quarterly and perpetual futures contracts. Quarterly futures expire after three months, while perpetual futures have no expiry date.
What Are Crypto Options?
Crypto options are contracts that give traders the option to buy or sell an asset at a fixed price and time. Traders can choose to exercise or not exercise their option at expiry. Crypto options let traders reduce the risk of loss and avoid liquidation that futures entail. Traders pay a fee called the premium to buy an option.
There are two types of options: call and put options. Call options let traders buy an asset on a specific date, while put options let them sell an asset on a specific date.
For example, you buy a call option for bitcoin at $10,000, hoping for a price rise. You pay a premium of $400 for this option. If bitcoin’s price drops to $5,000 by expiry, you can opt not to exercise your option. But you lose the premium of $400 that you paid for the option.
Futures vs. Options
Key Similarities Derivatives Both options and futues contracts are agreements between traders to buy or sell a particular asset at a predetermined price and on a specified date in the future. Crypto options contracts provide the contract holder with the right but not the obligation to buy or sell an asset at a predefined price and date. Both options and futures are derivatives that derive their value from an underlying asset, such as a cryptocurrency like bitcoin. Derivatives let investors speculate on market prices, hedge risks, and diversify their portfolios.
Leverage
Both options and futures allow traders to use leverage, which means borrowing money to increase their exposure and potential returns. Leverage can amplify profits but also losses. Binance Futures and Binance Options offer traders various leverage levels to suit their risk appetite and trading strategy.
Risk
Both options and futures involve risk, but options are generally less risky than futures. Options give traders the flexibility to exercise or not exercise their rights at expiry, while futures oblige traders to fulfill their contracts at expiry. Options also have limited downside risk, as traders can only lose the premium they paid for the option. Futures have unlimited downside risk, as traders can lose more than their initial margin if the market moves against them.
Obligation
The main difference between options and futures is the obligation to buy or sell the underlying asset. Options give traders the right but not the obligation to do so, while futures bind traders to their contracts at expiry.
Premium
Another difference between options and futures is the premium. Options require traders to pay a premium to buy the contract, while futures do not. The premium is determined by various factors, such as the strike price, expiry date, volatility, and interest rate.
Expiration
Another difference between options and futures is the expiration date. Options have a fixed expiration date, while futures can have different expiration dates depending on the type of contract. Quarterly futures expire every three months, while perpetual futures have no expiration date.
Conclusion
Options and futures are two types of derivatives that offer exposure to an underlying asset. They have similar trading fundamentals but different trading strategies. Options give traders more flexibility and less risk than futures, but also require a premium. Futures oblige traders to buy or sell the asset at expiry, but do not require a premium. Both options and futures allow traders to use leverage to increase their potential returns. Traders should understand the benefits and risks of each instrument before trading them on Binance Futures and Binance Options.
