Bitcoin Futures and Options: Explained
Bitcoin futures and options are financial tools that let investors buy or sell Bitcoin at a set price in the future. Futures lock in prices, while options give the choice to trade without obligation, helping manage risk and profit from price changes.
Bitcoin, the world’s first cryptocurrency, has changed finance significantly. As the crypto market expands, trading tools like Bitcoin futures and options have become available.
These tools allow traders to speculate on prices, manage risks, and improve strategies. Knowing how Bitcoin futures and options work is essential for anyone wanting to succeed in the crypto market and boost their investments.
What are Bitcoin Futures?
A futures contract is a legal agreement to buy or sell an asset at a set price on a specific date in the future. This asset can be a commodity, stock, or Bitcoin. These contracts are traded on exchanges and have standardized terms for quantity, quality, and delivery time.
How Bitcoin Futures Work?
Bitcoin futures operate like traditional futures contracts but focus on Bitcoin’s price. Traders agree to buy or sell a certain amount of Bitcoin on a future date at a set price. These contracts usually settle in cash, so no actual Bitcoin changes hands. Instead, the difference between the contract price and the market price at settlement is paid in cash.
Major exchanges offering Bitcoin futures trading include:
- Chicago Mercantile Exchange (CME)
- Bakkt
- Binance
- BitMEX
What are Bitcoin Options?
A Bitcoin options contract is a financial derivative that gives the holder the right, but not the obligation, to buy or sell Bitcoin (or any crypto) at a specific price (the strike price) before or on the expiration date.
How Bitcoin Options Work
Bitcoin options work like traditional options but are based on Bitcoin’s price. Here’s a breakdown:
- Call Options: These give the holder the right to buy Bitcoin at the strike price before the option expires. Traders buy call options if they think Bitcoin’s price will rise.
- Put Options: These give the holder the right to sell Bitcoin at the strike price before the option expires. Traders buy put options if they expect Bitcoin’s price to fall.
Typically, you would have to pay a premium, which is the cost of the option, to the seller for this right. If Bitcoin’s market price is favorable compared to the strike price, the holder can exercise the option. If not, they can let it expire worthless.
Check out our in-depth guide on Bitcoin options trading to learn more.
Major platforms offering Bitcoin options trading include:
- Bybit
- Deribit
- OKX
- Binance
Furthermore, check out our list of best platforms to trade crypto options for more.
Differences Between Bitcoin Futures and Options
| Factors | Bitcoin Futures | Bitcoin Options |
| Risk | High risk due to the obligation to buy or sell at the predetermined price upon contract expiry. You can incur huge losses if the market moves against the position. | Less risky because the holder is not obligated to exercise the option. The most you’ll lose is the premium paid for the option. |
| Reward | Highly rewarding due to leverage, enabling traders to amplify their gains if the market moves in their favor. | Substantial potential reward, especially with leveraged positions. Traders can benefit from large price movements while limiting risk to the premium paid. |
| Market Participants | Institutional investors, professional traders, hedgers, and retail traders. | Institutional investors, professional traders, and retail investors. Popular among those looking to hedge or speculate with defined risk. |
| Trading Strategies | Hedging, spread trading, and speculation. | Buying calls or puts, selling covered calls, implementing spreads, straddles, and strangles. |
How to Trade Bitcoin Futures and Options
Now that we know how Bitcoin futures and options work and the differences between the two, let’s get into the more practical stuff. The following is a step-by-step guide on Bitcoin futures and options trading and the different trading strategies you can use.
Step-by-Step Guide:
1. Choose a Trading Platform: Select a reputable and regulated platform that offers Bitcoin futures or options trading. Popular platforms include CME, Binance, BitMEX, Deribit, and OKX.
2. Create an Account: Sign up on your chosen platform. Enter the necessary information, verify your identity, and set up two-factor authentication for added security.
3. Fund Your Account: Add funds to your account. Most platforms accept various cryptocurrencies and fiat currencies.
4. Understand Contract Specifications: Familiarize yourself with the contract terms, such as contract size, strike price, expiration date, and tick size.
5. Conduct Market Analysis: Use technical and fundamental analysis to assess the Bitcoin market. Study price charts, indicators, news events, and market sentiment.
6. Develop a Trading Strategy:
- For futures trading, set entry and exit points, stop-loss levels, and profit targets. Common strategies include trend following, breakout trading, and mean reversion.
- For options trading, choose the type of options, strike prices, and expiration dates. Strategies include buying calls, buying puts, selling covered calls, and implementing spreads.
7. Place an Order: Enter a trade by placing an order on the platform. Choose between market orders (executed at the current market price) and limit orders (executed at a specified price). Specify trade details based on your strategy.
8. Monitor and Manage Your Trade: After your order is filled, monitor the trade closely. Adjust stop-loss and take-profit levels as needed to manage risk. Stay aware of market conditions and be ready to exit the trade if necessary.
9. Close Your Position:
- For futures trading, close your position before the contract expires by placing an offsetting order.
- For options trading, decide whether to exercise the option or let it expire worthless. Alternatively, you can sell the option before expiration.
10. Review and Reflect: After closing your position, review the trade to understand what worked and what didn’t. Reflect on your strategy and make adjustments for future trades.
Strategies for Trading Futures
The following are some of the most common Bitcoin futures trading strategies out of many others:
Trend Following: Identify and follow the market trend. Use indicators like moving averages, MACD, and trendlines to confirm the trend direction. Enter trades in the trend’s direction and exit when the trend shows signs of reversing.
Breakout Trading: Look for price breakouts from key levels of support or resistance. Enter trades when the price breaks out of these levels with high volume, indicating strong market momentum. Set your stop-loss orders below the breakout level to manage risks.
Mean Reversion: Trade is based on the expectation that the price will revert to its mean or average level. Use indicators like RSI or Bollinger Bands to identify overbought or oversold conditions. Enter trades in the opposite direction of the overextended price move.
Strategies for Trading Options
The following are some of the most common Bitcoin futures trading strategies out of many others:
Covered Call: Sell call options against a long position in Bitcoin. In this strategy, you earn money from the premium received while providing some downside protection.
Protective Put: Buy put options to protect against a decline in Bitcoin’s price. This strategy acts as an insurance policy, limiting potential losses.
Straddle: In this strategy, you purchase both a call and a put Bitcoin option with the same strike price and expiration date. This way, you can profit from significant price movements in either direction.
Pros and Cons of Bitcoin Futures and Options
We’ve already briefly touched upon some benefits and negatives of both Bitcoin futures and options trading without diving too deep into them. The following are the benefits and risks of futures and options trading, especially in crypto.
Potential Benefits
Leverage: Both Bitcoin futures and options allow traders to use leverage. This means traders can control larger positions even when they have less capital. That is how leveraged and margin trading works, increasing potential returns on successful trades.
Hedging: They also help investors and businesses manage risk by locking in future prices. For example, a mining company can use futures contracts to set a fixed price for their Bitcoin, protecting against price drops and ensuring stable income.
Diversification: They help investors diversify by adding a different asset class to their portfolios. Moreover, they also allow investors to profit from price movements without directly holding Bitcoin. For example, an investor holding stocks and bonds can trade Bitcoin futures to spread risk and potentially increase returns through exposure to the crypto markets.
Income Generation: This is an obvious one, but investors can profit from market movements by trading Bitcoin futures and options. For example, one can sell Bitcoin options to earn premiums from buyers or trade futures contracts to capitalize on price changes, creating additional revenue streams.
Flexibility: Both futures and options provide flexibility by offering various strategies to profit from different market conditions. Options, in particular, offer more flexibility since you don’t necessarily have to exercise your contract every time, unlike futures.
Common Risks
Leverage Risk: While leverage can boost gains, it also magnifies losses.
Market Volatility: Bitcoin’s extreme price volatility can lead to substantial losses, especially for leveraged positions, as discussed in the last point.
Liquidity Risk: Low liquidity in some futures and options contracts can cause slippage and make it hard to execute trades at desired prices, potentially affecting both entry and exit points.
Counterparty Risk: There’s a risk the counterparty (the seller of the option) in a trade might default (fails to fulfill their obligation), especially with over-the-counter (OTC) options. Using reputable, regulated exchanges can reduce this risk.
Complexity: You need a solid understanding of various instruments and strategies to trade futures and contracts effectively. This complexity can be a barrier for novice traders and lead to potential mistakes and losses.
Regulatory Risk: The regulatory environment for crypto and derivatives is constantly changing. New regulations can affect the availability and terms, creating uncertainty for traders.
FAQ
Which is riskier – Bitcoin options or futures?
Both Bitcoin options and futures are risky, but futures are usually riskier. With futures, you must fulfill the contract at expiration, which can cause big losses if the market moves against you. Options are more flexible because you can choose not to exercise them, limiting your losses to the premium paid.
How much do Bitcoin futures cost?
The cost of Bitcoin futures varies, but here’s an estimate. On the Chicago Mercantile Exchange (CME), one Bitcoin futures contract represents 5 Bitcoins. If Bitcoin is priced at $30,000, the contract’s value is $150,000. Margin requirements are typically around 10%, so you’d need about $15,000 to trade one contract.
Prices and margin requirements can vary by exchange and market conditions.
How much do Bitcoin options cost?
The cost of Bitcoin options depends on the strike price, expiration date, and market conditions. You pay a premium to buy an option. For example, a Bitcoin option with a strike price of $30,000 might cost a few hundred dollars, but the exact price varies. Always check the specific platform for current prices