Cryptos have gained so much popularity as an investment that the question is not whether to invest but how to invest. And there are two often juxtaposed options, futures trading and options trading. All investors the world over have one key unifying trait, profit maximization.
There are very few investment options that match cryptocurrencies in returns since the Covid-19 economic recession. A good reference, not even gold has been able to keep up with Bitcoin’s gains. Yet, several notable blockchains such as Ethereum and Doge made more gains than bitcoin in the past two years.
Since there are many cryptocurrencies, how better off is one going for futures trading instead of options trading? Read on
What are Futures and Options Trading?
Before diving into why one is better than the other, it would be advisable to get a picture of what either entails. However, both are contracts that are to be fulfilled during a trade.
Futures trading is a contract requiring the trader to buy for buyers or sellers to sell crypto assets at a specific future date. The trader’s out option is only if their holding position is closed before the contract’s expiry.
Options trading is, in turn, a trading contract where a trader reserves the right to buy for or sell crypto assets at a specific price at any time the contract is in effect. They are, however, not obligated to make the trade. Call options are options to buy, while put options are options to sell.
Why Futures Trading is More Lucrative
As has been revealed, the two trading options have differing requirements, but both allow investors to make money by hedging their investments. Below are key selling points as to why futures trades may offer the most lucrative deal of the two.
Futures are More Liquid than Options
In trading cryptos, liquidity is a key determinant of a trading choice. Futures trading is characterized by higher liquidity when compared to options trading. A higher liquidity feature makes futures much better choices for day trading than options trades. They also enjoy a lesser slippage than options.
A futures trade is more liquid than an options trade because options contracts have to move in correlation to a futures contract. The rate of movement ranges from 50% of futures contracts for at-the-money options contracts to 10% for in-depth out-of-the-money options contracts.
Futures Hold on Value Over Time More than Options
A futures trade tends to maintain its value more over time than an options trade. They hold value using their ability to withstand time decay, unlike options.
The grouping of Options trade contracts falls into the fast wasting assets category. These are assets that gradually lose their value irreversibly due to their limited lifespan. It is the gradual loss of value known as time decay. So from the point of purchase of an options trade contract, it will lose value every day that passes until the time of expiry.Â
Options create a puzzle where one may be right about predicting trade trajectory when they made the purchase. But the trader will still end up with a worthless options contract on expiry since price movements weren’t enough to exceed the value most through time decay. Futures trade contracts would in such an instance, still be worth a considerable value.
Having More Stable Trading Costs
Compared to options, futures have a costing advantage when . Trading in futures contracts attracts more stable upfront trading costs than those charged in trading via options contracts.
In most instances, the margin requirements for trading in coin futures remain stagnant over the years. If the crypto’s price becomes exceptionally volatile, the margin costing may rise slightly to reflect this. The advantage of such stable costing is that an investor knows beforehand what the initial margin cost.
Options trading, on the other hand, has widely fluctuated and varied trading costs. The underlying asset and the markets dictate the options premium paid to purchase an options contract. Any volatility in either the broad market or the crypto asset traded directly translates to higher premium figures. It is well-known that cryptos that aren’t stablecoins always face price volatility, hence difficulty in knowing the premium beforehand.
Futures Have Better Suited Features for Crypto Trade
Futures trading contracts admittedly perform poorly in stocks trade when compared to options trading contracts. But they, in turn, have features well suited for trading currencies like cryptocurrencies and commodities.
Trading using futures allow for easy leveraged trading thanks to the more conducive features. They include standardized delivery amounts, standardized maturity dates, and organized exchanges.
Such characteristics are conducive for risk-tolerant crypto investors like hodlers and institutions. While options do have some good features for hedging investors in the crypto trade, issues like unstable premiums and time decay reduce their advantage.
Author’s Note
Futures trading and options trading are increasingly lucrative ways for crypto investors to hedge their investments. They offer good pre-negotiated contracts against collateral that give investors a chance to increase their crypto assets.
However, Futures trade contracts do appear to have the edge over their options counterparts. They offer higher liquidity and better suitable features for crypto investors. They also still attract a more or less stable initial margin cost, very crucial for one to estimate what potential earnings they can make. All the while, futures contracts also maintain their value better than options contracts which are wasting assets.
