Crypto Futures and Options: 3 Mistakes Traders are Succumb to
Mistakes are like sweet traps or things that have good disguises as harmless ones. Once you make mistakes, however, you can lose all your fortunes. This blog covers three significant pitfalls that traders seem to be tempted to make.
Futures and options have attracted many beginners due to the promise of high potential returns. The influence of celebrities and KOLs trading these instruments might profoundly impact how novice traders pick their instruments. The advertisements for earning incredible gains are old, but never stop being tempting!
Yet, it is kind of a sweet trap that we are talking about. People get overwhelmed by the great amount of information, both online and offline so they love to be guided by someone who seems to be an expert.
It is fair to say that futures and options are profitable, yet they should come hand in hand with high risks. You might undertake even higher risks when trading crypto futures and options. Cryptocurrency derivatives are sensitive to major financial market events. You have to deal with the volatility and sensitivity in the tumultuous price actions, which can cost you a fortune.
Overlook the Benefits and Risks of the Isolated Margin
It is necessary to transfer funds from regular spot wallets to futures markets when getting involved in derivatives exchanges. Choosing between cross-collateral is among the options, which means there are various isolated positions in the same deposit.
Novice traders are prone to equip themselves with a lack of knowledge, which leads to being liquidated by the failure of administering the margin deposits. Yet, if you know the right how-tos, you can enjoy the flexibility and risk management of an isolated margin.
There are always pros and cons to each method as no perfect approach exists. The best thing we can do is to recognize the benefits and risks for optimal applications. In this case, you should use cross margin to enter the stop loss on every trade manually.
Taking the Options’ Liquidity as the Obvious
The liquidity of options trading is among the contributing factors to the expense of opening and closing positions. So, if you do not consider this aspect carefully, it can add up the embedded expenses as cryptocurrencies have high volatility.
The minimum open interest is 50x the number of desired contacts. This figure represents the number of previously bought or sold contracts having a strike price and expiration date.
The knowledge about implied volatility can support traders. They can easily make up their minds about the ongoing price of an options contract and their next price moves in the future. The thing you should bear in mind is that an option’s premium climbs along with the increased implied volatility.
You should avoid buying calls and puts that have excessive volatility. Be patient in the mastery of derivatives trading through the small start and many testings of each function before making a large bet placement.
Ignore the Convexity of Trading Crypto Futures and Options
The value of the margin deposit changes when the oscillation of the underlying asset’s price happens. For example, when the price of Bitcoin increases, investing margin will rise in the U.S. dollar terms with additional leverage.
The problem arises when the opposite movement and the BTC price collapse take place. So, the deposited margin of users will drop in the U.S. dollar terms. Beginners tend to get overexcited when trading futures contracts and reduce their leverage in the situation of the increasing BTC price.
Thus, the optimal solution is to avoid solely increasing the positions due to the delivery by the enhanced value of margin deposits.
FAQs
What is the Isolated Margin?
An isolated margin indicates the balance of margin allocated to an individual position. Its restrictions on the amount of each margin enable traders to have better risk management in their individual positions. It is possible to adjust the allocated margin balance for each position.
What is the Liquidity of Options?
Liquidity indicates how easy and quick the sale of an asset for cash can be at prevailing market prices. So, if an options contract has low liquidity, it means the contract has very low or no open interest. Considering this aspect can help you make up your mind about holding, buying, or selling the options.
Is It Possible to Do Options with Crypto?
Yes, we can buy or sell crypto options contracts on any crypto trading platform. Some platforms that you can take into consideration can be Bybit, Delta Exchange, Deribit, FTX Us Derivatives, Binance, OKX, Quedex, Bit.com, etc.
What Crypto Options are Available?
You can trade options of BTC, ETC, and BCH even if you are an institutional and retail investor. The most popular ones include Bitcoin (BTC) and Ethereum (ETC).
Can You Do Futures with Crypto?
Yes, you can. The Chicago Mercantile Exchange (CME) allows traders to trade Bitcoin (BTC) futures contracts with the offers of monthly contracts for cash settlement, six-month contracts, etc.
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