Crypto Futures vs. Options
Gone are the days when crypto investing was just about buying coins and hoping "number go up". Futures and options have crashed the party, offering savvy traders new ways to play the crypto game.
Futures let you lock in a price for later, protecting you from unexpected price changes. Options give you the choice to buy or sell at a set price, allowing you to profit from price moves if you choose to.
They're not just fancy gambling tools; they're actually indicators of a maturing market, mirroring the historical development of traditional asset classes. These instruments bring liquidity, allow for more nuanced expressions of market views, and provide essential tools for risk management.
Today, we're going to compare these two cornerstones of the derivative world. And more importantly, we'll explore how you can use them to your advantage in your crypto trading strategy.
What are crypto futures?
There are two types of futures you'll encounter in the crypto space: convention and perpetual futures.
Conventional crypto futures
Conventional futures are standardised contracts that obligate the holder to buy or sell a specific amount of an underlying cryptocurrency (e.g., Bitcoin, Ethereum, Solana) at a predetermined price on a set future date (the expiration date). Here are the key points to understand:
Expiration date: The contract has a fixed end date when the trade must be executed.
Settlement: At expiration, the contract is settled (usually in stablecoins or fiat currency). The amount settled is the difference between the futures contract price and the spot price upon expiration.
Standardisation: Contract terms are standardised, making them easily tradable on exchanges.
Example of a futures trade: Let's say Bitcoin is trading at $50,000, and you believe the price will rise. You could enter into a futures contract to buy 1 BTC at $52,000 three months from now. If Bitcoin's price rises to $60,000 by the expiration date, you've made a profit of $8,000 (minus fees). However, if it drops to $45,000, you'd be obligated to buy at $52,000, resulting in a $7,000 loss.
Perpetual crypto futures
Not all futures contracts have an expiration date. When they don’t have an expiration they’re called perpetual futures and they allow traders to hold positions indefinitely (or until they're liquidated).
Most digital asset exchanges (including VALR) offer crypto futures trading in perpetual futures.
The price of perpetual futures tends to stay close to the spot price of the underlying asset.
To achieve this, there's a mechanism called the funding rate that turns positive when the futures price is higher than the spot price and negative when the futures price is lower than the spot price. Buyers (longs) pay sellers (shorts) the funding amount when the funding rate is positive, while a negative funding rate obliges shorts to pay the funding amount to longs.
To summarise how exchanges implement the funding rate mechanism:
If the perpetual price is higher than the spot price, long positions pay short positions.
If the perpetual price is lower than the spot price, short positions pay long positions.
This incentivizes traders to take positions that bring the perpetual price back in line with the spot price.
Perpetual futures have become incredibly popular due to:
No expiry means no need to constantly roll over positions.
Easier to understand and trade for newcomers.
Often more liquid than conventional futures.
Allows for long-term speculation or hedging without worrying about contract expiration.
What are crypto options?
Options are contracts that give the buyer the right, but not the obligation, to buy or sell an underlying cryptocurrency at a specified price (strike price) within a set time frame.
Here are the key points to understand:
Right, not obligation: The buyer can choose whether or not to exercise the option.
Premium: The buyer pays a fee (premium) for this right.
Strike price: The predetermined price at which the crypto can be bought or sold.
Expiration date: The last date on which the option can be exercised.
There are two ways to trade options: bet on the price going up, or bet on the price going down.
Call options: These are your "price go up" bets. Buying a call option gives you the right to purchase the cryptocurrency at the strike price before the expiration date. If the market price shoots above your strike price, you're in the money - you can buy low and sell high.
Put options: Think of these as your "price go down" insurance policies. Buying a put option gives you the right to sell the cryptocurrency at the strike price before the expiration date. If the market price plummets below your strike price, you've protected yourself - you can sell high even when the market is low.
Remember, with both calls and puts, you're buying the right, not the obligation. If the market doesn't move in your favor, you can simply let the option expire. Your loss is limited to the premium you paid for the option.
Simple example of a call option trade: Imagine Ethereum is trading at $3,000, and you believe it will go up in the next month. You could buy a call option with a strike price of $3,200 expiring in one month for a premium of $100.
If ETH rises to $3,500, you could exercise your option to buy at $3,200 and immediately sell at $3,500, profiting $200 (minus the $100 premium).
If ETH drops to $2,800, you would choose not to exercise the option. Your loss is limited to the $100 premium you paid.
This example illustrates a key advantage of options: limited downside risk for buyers, combined with potentially significant upside.
In contrast with crypto futures, options are less risky, as the premium is the maximum amount of funds you can lose in a trade. However, it also hurts your profitability when crypto prices move in a favorable direction. Also, the strike price puts a cap on your maximum profits (as you can't buy the underlying asset at a higher price than the strike price).
Options prices are not nearly as straightforward as spot or futures prices, as they take many variables into account, such as delta, theta, and gamma, and the Black-Scholes-Merton (BSM) model for calculating contract prices. Also, the value of a crypto options contract decreases as it comes closer to expiry, making it worthless after the expiration date.
This complex pricing mechanism makes options less beginner-friendly than crypto perpetuals. At the same time, the presence of an expiration date comes with less flexibility for traders.
Crypto futures vs. options comparison table
| Aspect | Conventional Futures | Perpetual Futures | Options |
|---|---|---|---|
| Use Cases | Hedging, Price speculation, Locking in future prices | Continuous price speculation, Long-term positions without rollover | Hedging with limited risk, Profiting from volatility, Complex strategies |
| Expiration | Fixed expiration date | No expiration date | Fixed expiration date |
| Obligation | Must buy/sell at expiration | Can hold position indefinitely | Right, not obligation to buy/sell |
| Price Alignment | Converges to spot at expiration | Uses funding rate to align with spot | Premium reflects probability of profit |
| Risk Profile | Unlimited potential gain/loss | Unlimited potential gain/loss | Limited loss for buyers, unlimited for sellers |
| Leverage | High leverage possible | High leverage possible | Leverage through premium, lower capital requirement |
| Complexity | Moderate | Moderate | High (due to Greeks, strategies) |
| Liquidity | High | Very high in crypto markets | Moderate to high, depends on strike/expiry |
| Profit/Loss Calculation | Based on difference between entry and exit/settlement price | Based on difference between entry and exit price, plus funding payments | Based on intrinsic value at expiration or sale price of option |
| Time Decay | No direct time decay | No time decay | Significant impact (theta) |
| Volatility Sensitivity | Indirect impact | Indirect impact | Direct impact (vega) |
| Settlement | Settlement in stablecoin or fiat at expiration. | Realized P&L settled in stablecoin or fiat upon closing position. | Settlement in stablecoin or fiat if exercised. Most expire worthless. |
| Market Impact | Can significantly influence spot price | Strong influence on spot price | Can affect spot price and volatility |
| Unique Features | Standardised contracts | Funding rate mechanism | Greeks (delta, gamma, theta, vega) |
| Advantages | Straightforward, High liquidity | No time decay, No expiration or rollover, Highly liquid in crypto | Limited risk for buyers, Versatile strategies, Potential for high returns |
| Disadvantages | Rollover needed for long-term positions, Full exposure to price movements | Funding rates can be unpredictable, Harder to use for precise hedging | Complex, Time decay, Can be expensive (high premiums) |
How to Choose Between Crypto Futures and Options
The choice between futures and options ultimately depends on your trading goals, risk tolerance, and market outlook. Here are some key questions to ask yourself, along with recommendations based on your answers:
- Are you looking for a straightforward way to leverage your position, or do you need more complex strategies?
- If you prefer simplicity: Consider futures (especially perpetual futures for their simplicity and no expiration)
- If you're comfortable with complexity and want more strategic flexibility: Options may be more suitable
- How much risk are you willing to take on? Are you comfortable with potential unlimited losses, or do you prefer to cap your risk?
- If you're willing to take on higher risk for potentially higher rewards: Futures might be appropriate
- If you want to limit your potential losses: Consider buying options (calls or puts)
- Are you making a directional bet on price, or are you trying to profit from volatility or hedge your positions?
- For straightforward directional bets: Futures are often the go-to choice
- If you want to profit from volatility or need advanced hedging strategies: Options offer more versatility
- How much capital do you have available, and how efficiently do you need to use it?
- If you have limited capital but want high exposure: Futures offer high leverage
- If you want to control a large position with a smaller upfront cost: Buying options might be preferable
- How certain are you about the timing of a potential price move?
- If you're confident about both direction and timing: Futures or shorter-term options could work
- If you're unsure about timing but confident in direction: Longer-term options or perpetual futures might be better
Remember, while these instruments offer exciting opportunities, they also come with significant risks. It's crucial to thoroughly understand how they work before incorporating them into your trading strategy. Start small, continually educate yourself, and never risk more than you can afford to lose.
Trade perpetual futures on VALR
Now that you've got a solid grasp on crypto derivatives, let's dive into how you can put this knowledge into practice with VALR's perpetual futures offering. VALR provides a robust platform for trading perpetual futures, designed with both novice and experienced traders in mind.
Key features of VALR's perpetual futures:
- Leverage: VALR offers up to 10x leverage, depending on the trading pair. This allows you to amplify your potential profits, but remember, it also increases your risk.
- Cross-Collateralised Accounts: VALR uses a cross-margin system, where all assets in your futures sub-account that qualify as collateral can be used to back your positions. This can lead to more efficient use of your capital.
- Wide Range of Trading Pairs: VALR offers perpetual futures contracts on various cryptocurrencies, including popular ones like BTC, ETH, and SOL, as well as emerging tokens like WIF and TON.
- Funding Rate Mechanism: Like all perpetual futures, VALR's contracts use a funding rate to keep the futures price aligned with the spot price. This occurs hourly, with longs paying shorts when the contract trades at a premium, and vice versa.
- Risk Management: VALR employs a multi-stage liquidation process to protect both traders and the overall market stability. This includes:
- Initial Margin: The collateral required to open a position (e.g., 20% for 5x leverage)
- Maintenance Margin: The level at which your account risks liquidation
- Auto-close Margin: The point at which your positions will be fully closed out
- Mark Price: VALR uses a sophisticated mark price calculation to ensure fair valuation of open positions, incorporating both the index price of the underlying asset and the current state of the futures market.
- Insurance Fund: VALR maintains an insurance fund as a final backstop for bankrupt positions, adding an extra layer of security to the trading ecosystem.
Getting started with VALR's perpetual futures is straightforward:
Sign up for a VALR account if you haven't already.
Complete the necessary KYC (Know Your Customer) procedures.
Transfer funds to your futures sub-account. Remember, this account is cross-collateralised, so any assets with a collateral weighting can be used.
Familiarise yourself with the contract specifications for your chosen trading pair, including minimum and maximum order sizes.
Start with a small position to get comfortable with the platform and its features.
Remember, while perpetual futures can be a powerful tool in your crypto trading toolkit, they come with significant risks. Always use proper risk management techniques, including stop-loss orders, and never invest more than you can afford to lose.
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Frequently Asked Questions
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No, crypto futures are contracts obligating the holder to buy or sell an asset at a predetermined price and date, while crypto options give the holder the right, but not the obligation, to buy or sell at a specific price within a set time frame.
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VALR is a recommended platform for trading crypto futures due to its leverage options, wide range of trading pairs, and robust risk management features like cross-collateralized accounts and an insurance fund.
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Crypto options work by giving the buyer the right, but not the obligation, to buy (call option) or sell (put option) an asset at a specific strike price before an expiration date. Buyers pay a premium for this right and can profit based on market movements or limit losses to the premium paid.
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Crypto futures allow for high leverage, hedging against price movements, long-term speculation without rollovers (for perpetual futures), and increased liquidity in the market.
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The expiration time for crypto options depends on the contract. Each option has a fixed expiration date defined at the time of its creation, and after this date, the option becomes void or is settled based on its intrinsic value.
Risk Disclosure
Trading or investing in crypto assets is risky and may result in the loss of capital as the value may fluctuate.
VALR (Pty) Ltd is a licensed financial services provider (FSP #53308).
Futures trading is provided by VALR DAM Pty Ltd as a Juristic Representative of CAEP Asset Managers Pty Ltd (FSP number: 33933) an authorised financial services provider.
Disclaimer: Views expressed in this article are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.
