With the emergence of cryptocurrency and with no regulatory overview, it is one of the ways to invest their funds and diversify their portfolio. The rise in futures and options in equities in India is high compared to the world. Now, with these digital currencies being volatile these derivatives can be used as hedging and protecting investments during unexpected periods.
What Are Crypto Futures and Options?
Crypto Futures and Options (F&O) are financial derivatives that allow traders to speculate on the future price of cryptocurrencies without owning the underlying assets.
Perpetual F&O Contracts: These allow traders to hold positions indefinitely, as they do not have an expiration date. This feature provides flexibility and enables traders to maintain their positions as long as they choose. However, these contracts typically involve periodic funding rates, which help align the contract price with the spot price of the asset.
Fixed-Date F&O Contracts: These come with a specific expiration date and time. Traders must close or settle their positions by this deadline. Settlement can occur through physical delivery of the asset or via cash settlement, where the difference between the contract price and the market price is paid.
How Do Crypto F&O Work?
Crypto F&O works by providing traders with contracts that are tied to the price of cryptocurrencies.
Contract Specifications: Each contract, outlines details such as the underlying cryptocurrency, the contract size, the price at which it can be bought or sold, and the expiration date.
Leverage: Many exchanges offer leverage, allowing traders to control larger positions than their initial investment.
Margin: To engage in F&O trading, traders must maintain a margin account. This margin acts as collateral for their trades. If the market moves against their position, traders might receive a margin call, prompting them to deposit additional funds to keep their position open.
Settlement: At expiration, contracts can be settled in different ways. Most crypto futures are cash-settled, meaning that traders pay or receive the difference between the contract price and the market price at expiration. Options contracts can either be exercised or left to expire worthless.
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Smart Contracts
They automate the execution of agreements, ensuring that all conditions are met before any transaction occurs. They enhance transparency and efficiency in trading, as they eliminate the need for intermediaries and reduce the risk of disputes.
Benefits and Risks
Trading crypto F&O offers various advantages. It allows traders to leverage their investments. The ability to go both short and long means traders can profit in upside and downside markets. Additionally, the F&O contracts can serve as a hedge against price volatility.
Conclusion
Crypto Futures and Options provide traders with opportunities in the cryptocurrency market. They allow speculation on future price movements without the need to own the underlying assets. However, understanding how these contracts work and implementing and applying risk management strategies is crucial before trading.
Written by: Santhosh
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