The commitment to high returns frequently draws new traders to the futures and options markets. These market participants observe influencers making huge profits, and many find it hard to resist the numerous advertisements from derivatives exchanges that offer 100x leverage.
Even though traders can use recurring derivatives contracts to boost gains, a few errors can quickly turn the aspirations of enormous profits into traumatic experiences and a depleted account. Issues specific to cryptocurrency markets affect even seasoned investors in traditional markets.
Since contracts between buyers and sellers are based on an underlying asset, cryptocurrency derivatives operate similarly to traditional markets. The contract cannot be retracted or forwarded among different exchanges.
Most exchanges provide options contracts priced in Bitcoin and Ether, so the gains or losses will fluctuate with the asset’s price changes. Additionally, options contracts give the option to buy now and sell later for a set price. This enables traders to create hedging and leverage strategies.
Here are a few common mistakes one should not make while investing in futures and options.
Convexity could ruin your account.
Convexity is the first problem that traders encounter when trading cryptocurrency derivatives. In this case, as the underlying asset’s price fluctuates, so does the value of the margin deposit. The investor’s margin increases in U.S. dollars as the cost of Bitcoin rises, enabling more leverage.
The problem arises when the opposite movement occurs, and the price of BTC collapses; as a result, the users’ deposited margin declines in U.S. dollars. When trading futures contracts, traders frequently overreact, and as the price of bitcoin rises, favorable headwinds lower their leverage.
The main lesson here is that traders should do more than increase positions to take advantage of the delivery brought on by rising margin deposits.
Isolated margin has advantages and disadvantages.
Users of derivatives exchanges must transfer money from their usual spot wallets to futures markets, though some provide a separate margin for perpetual and monthly contracts. Traders can choose cross collateral, where a single deposit serves multiple positions, or isolated collateral.
Each option has advantages, but inexperienced traders frequently need clarification and gain money by improperly managing their margin deposits. On the other hand, an isolated margin provides greater flexibility to support risk but necessitates additional actions to prevent excessive liquidations.
One should always use cross margin and manually enter the stop loss on each trade to address this problem.
Bear in mind that not all options markets have liquidity.
Trading on illiquid options markets is another standard error. The cost of opening and closing positions increases when trading illiquid options, and options already have embedded costs because of the high volatility of cryptocurrencies.
Trading in options requires that the open interest be at least 50 times the desired number of contacts. The number of active contracts with a strike price and expiration date bought or sold is known as open interest.
A better understanding of implied volatility can also aid traders in making more informed decisions regarding the current price of an option contract and potential future price changes. Remember that higher option premiums accompany higher implied volatility.
The best action is to refrain from purchasing calls and puts with high volatility.
Trading in derivatives requires patience, so traders should begin small and experiment with each feature and market before making significant bets.