“Newbie” traders often feel interested in the futures and options markets due to the promise of high profits. KOL articles about huge profits and numerous advertisements from derivatives exchanges offering 100x leverage are irresistible to most people.
Although traders can effectively increase profits with periodic derivative contracts, just a few mistakes are enough to turn the dream of earning “huge” profits into a nightmare and become empty-handed in an instant. Even experienced investors in traditional markets fall victim to some specific problems in the cryptocurrency market.
Crypto derivatives operate similarly to traditional markets because buyers and sellers enter into contracts that depend on the underlying asset. The contract cannot be transferred across different exchanges, nor can it be withdrawn.
Most exchanges offer options contracts priced in Bitcoin and ETH, so profits or losses will vary depending on the asset’s price movements. Options contracts also provide the right to buy and sell at a later date at a predetermined price. This gives traders the ability to build leverage and hedging strategies.
Let’s look at three common mistakes to avoid when trading futures and options.
Convexity can kill your account
The first problem that traders encounter when trading cryptocurrency derivatives is convexity. In this case, the margin deposit changes value as the price of the underlying asset fluctuates. As the price of Bitcoin increases, investor deposits increase in US dollar terms, allowing for additional leverage.
The problem appears when the opposite movement occurs and the BTC price collapses. Therefore, users’ margin deposits decrease accordingly. Traders often get too excited when trading futures contracts, and positive factors reduce their leverage as BTC prices rise.
Therefore, traders should not increase positions simply due to transfers when the value of margin deposits is increasing.
Separate margin brings benefits but also many risks
Derivatives exchanges require users to transfer funds from regular spot wallets to the futures market, and some will provide separate margin for perpetual and monthly contracts. Traders can choose between cross-collateralization (meaning the same deposit serves multiple positions) or separate collateral.
Each option has its own benefits, but beginner traders are often confused and liquidated due to not managing margin deposits correctly. Separate margin, on the other hand, is more flexible to support risk, but requires additional maneuvering measures to prevent excessive liquidation.
To solve this problem, always use cross margin and enter a manual stop loss order for each trade.
Not all options markets are liquid
Another common mistake is trading with illiquid options markets. Trading illiquid options contracts increases the costs of opening and closing positions, and options contracts already have embedded costs due to the high volatility of cryptocurrencies.
Options traders must ensure open interest (OI) is at least 50 times the number of contacts they want to trade. Open interest represents the number of outstanding contracts with strike price and expiration date that have been previously bought or sold.
Understanding underlying volatility can also help traders make better decisions about the current price of an options contract and potential future changes. Remember that option premiums increase with higher implied volatility.
The best strategy is to avoid buying and selling orders that are too volatile.
In short, it takes time to master derivatives trading, so traders should start small and test each function and market before making big bets.
