Bitcoin derivatives can be traded in many forms, and Bitcoin Futures and Options are two of the most popular ones. Have you learned about them?

Bitcoin derivatives are tradable securities or contracts with underlying assets as their source of value (Bitcoin spot rate). Trading crypto derivatives has several benefits, including reduced volatility-related risks and the ability to profit from any price movement. Due to increased interest among the crypto trading community, Bitcoin Futures and Options are now among the most popular financial products on any cryptocurrency exchange or trading platform. Let's learn more about them in this article.

How to Trade Bitcoin Futures and Options


Bitcoin Futures Definition

The first thing to understand about trading Bitcoin Futures is that there are no Bitcoins involved. Since futures are financial contracts that settle in cash, no Bitcoin is exchanged.

You speculate on the price of Bitcoin rather than buying or selling the underlying cryptocurrency asset, as with other futures contracts.

The difference between the selling price and the settlement price is paid out to the purchaser of the futures contract if the buyer or seller of a Bitcoin Futures contract retains the position and shows a profit on the delivery date.

Take note that Bitcoin Futures is an exciting and rapidly increasing market that draws trillions of dollars in volume and liquidity from all over the world. So, consider your risk tolerance and financial objectives carefully when deciding if Bitcoin Futures are appropriate for you.

Traders may take a long or short position in a Futures contract. Long positions agree to buy the asset at a certain price on a specific date, while short positions agree to sell the asset at a price at a specific moment. Traders must execute buy or sell orders at the agreed-upon price at the time of contract entry, regardless of the underlying asset's price at a later date. The price of Bitcoin Futures is strongly connected to the price of the underlying asset, which is Bitcoin in this case. Individuals can choose to earn or lose money on their contract before it expires.

The lack of a widely agreed-upon reference price and problems of trading and position limits are some of the possible challenges related to Bitcoin Futures trading. Nonetheless, Bitcoin Futures can make the price of Bitcoin less volatile by balancing price fluctuations.


Step-by-Step on How To Trade Bitcoin Futures

If you have never traded futures before, learn how they work and the criteria for traders. To begin with, the margin requirements for Bitcoin Futures are very high. Here is a tutorial on how to trade Bitcoin Futures for beginners.


  • Step 1: Open Bitcoin Futures Account

Create a Bitcoin Futures account in one of your favorite exchanges (e.g., Binance exchange ), and then activate your account. Please note, before you start trading on Binance Futures, you must allow 2FA verification to fund your Futures account.

How to Trade Bitcoin Futures - Step 1


  • Step 2: Deposit Funds to Your Account

You will never really understand how to trade Bitcoin Futures until you put your strategy to test. Trading in a demo account or simulator helps you practice without risking any money and solves any problems with your trading strategy. After that, you can finance your trading account and start trading. Making small trades at the start will help you save a lot of money and time. You can increase your transaction size with more confidence after you have built up your account with small trades.

How to Trade Bitcoin Futures - Step 2


  • Step 3: Choose Any Contract That Fits You

Choose a Bitcoin Futures contract that you want to invest in for your portfolio. On Binance, there are two kinds of Bitcoin Futures contracts: USDS-M Futures and COIN-M Futures. If you want to trade BTCUSDT perpetual contracts, for example, choose USDS-M Futures. On the other hand, pick COIN-M Futures for BTCUSD coin-margined contracts.

See also: List of Bitcoin Exchanges with Margin Trading

How to Trade Bitcoin Futures - Step 3


  • Step 4: Choose Your Leverage

For your Bitcoin Futures contract, choose the proper leverage. Binance allows their customers to trade Bitcoin Futures with up to 125x leverage. The default leverage is 20x, but users can change it if they want. If you just started in the Bitcoin Futures contract, it is better to choose between 5x or 10x leverage to prevent extreme losses when the market moves against you.

How to Trade Bitcoin Futures - Step 4


  • Step 5: Place Your Order

Place your orders on Binance Futures using the various order types available. You can choose between a buy-limit or a buy-market order for your first Bitcoin Futures contract if you think the price will rise. You can also choose a sell-limit or a sell-market order if you think the price will drop.

How to Trade Bitcoin Futures - Step 5


Bitcoin Options Trading Definition

Options trading is a financial instrument that gives you the right to buy or sell an asset if its price rises above a certain level over a specific period. The strike price is the price at which the option holder will perform the option. Since the option's holder must pay a premium to purchase the option, the option owner makes a profit if the asset does not meet or pass above the strike price. If the asset's price moves above the strike price higher than the premium charged, the holder makes a profit.

Since there would be a more significant gap between the strike price and the settlement price at expiry, traders will be able to make better returns if the market moves in their favor. Options may be used to bet on market fluctuations and hedge against positions that have already been taken.

There are two choices in Bitcoin options trading:

  1. The holder of a Bitcoin call option has the option to purchase an asset at or above the strike price.
  2. Put options enable the Bitcoin holder to sell at or below the strike price.

The most significant difference between trading conventional options and crypto options is that the crypto market is open 24 hours a day, seven days a week, while traditional stock markets are only open from 9:30 a.m. to 4:00 p.m. Monday through Friday. Crypto markets are often more unpredictable, which means that the price fluctuates more often and sharply.

Bitcoin options are typically traded in lots, with the lot size varying depending on the type of choice. Several popular exchanges that provide crypto options trading are OKEx, Deribit, Bit, FTX, Quedex, Bakkt, LedgerX, IQ Option, CME Group, and Skew. 


How To Trade Bitcoin Options

As stated in the previous part, the procedure for trading options is as follows:

  1. Call and put options contracts are "written" by an options seller.
  2. Each contract has an end date or time as well as a "strike price." This strike price is the price at which the contract holder has the option to purchase or sell the underlying asset at the contract's expiration date.
  3. The contracts are then listed on the crypto options exchange by the options seller.
  4. A buyer of an option may often put an order on the market, and a seller of options can sell into it.

A "premium" is the term used to describe the expense of an option. In specific ways, it sounds like something from the insurance industry. An individual buying a put, for example, is doing so as a form of downside defense. If the underlying asset's price falls below the strike price, the option's owner may be reasonably sure that the option's writer can purchase the asset from him at that fixed price.

Premiums are mostly priced based on the amount of time left on the contract, implied volatility (the predicted standard deviation of the underlying asset's price between the contract's start and end dates), interest rates, and the underlying asset's current price.

To put it simply, you need to choose "Call" or "Put" options in your trading platform. Once you choose the options, you need to wait until the timer expires, and then you will either have realized profits or realized loss according to the current price.

How to trade bitcoin options

For example, the price of one Bitcoin was $34,000 on May 10th, but Jane believes it will be even higher by the end of February. She agrees to purchase ten call options with a strike price of $36,000 and a premium of 0.002 Bitcoin per offer, which expires on June 10th. At the moment, Jane buys the call options, 0.002 Bitcoin at $34,000 equals $68.

Each contract grants Jane to buy 0.1 Bitcoin for $36,000 per coin. When the executed contract ends at the end of February, Jane will purchase one Bitcoin for $36,000.

In a good scenario, Bitcoin will then be around $40,000 before it expires. Jane earns $4,000 by executing her call option (40,000 - 36,000 = 4,000). Her balance will amount up to $3,320 after some fee deduction.

In a bad scenario, the price of Bitcoin moves lower to $32,500 before it expires. Since her call choice is "out of the money", Jane chooses not to use it. Overall, Jane loses $680, the cost of the call premium.

Tell us what you want to find

Considering the existing risks both in Bitcoin Futures and Options, pay attention to your trading goals for each trade, the amount of risk you expect to take on a trade, and how much risk is ideally appropriate on each trade as you build your trading strategy.

Furthermore, learn about technical and fundamental analysis metrics, the types of orders you will use, and how you will monitor the price movements. When investing in the volatile market of Bitcoin Futures or Options, money management and position sizing are absolutely crucial.