3 Big Mistakes to Avoid When Trading Crypto Futures and Options

Beginners are usually attracted to the futures and options markets because of the promise of high returns. These novice traders watch influencers post incredible gains, and at the same time, multiple ads from derivatives exchanges offering 100x leverage are at times irresistible to most.

Although traders can effectively increase their profits by repeating derivative contracts, a few mistakes can quickly turn the dream of big profits into a nightmare and an empty account. Even experienced investors in traditional markets fall victim to specific problems in cryptocurrency markets.

Cryptocurrency derivatives work in the same way as traditional markets because buyers and sellers enter into contracts dependent on an underlying asset. The contract cannot be transferred to different exchanges, nor can it be withdrawn.

Most exchanges offer options contracts priced in Bitcoin (BTC) and Ether (ETH), so the gains or losses will vary according to the asset’s price fluctuations. Option contracts also give the right to buy and sell at a later date for a predetermined price. This gives traders the opportunity to build leverage and hedging strategies.

Let’s examine three common mistakes to avoid when trading futures and options.

Convexity can kill your account

The first problem traders face when trading cryptocurrency derivatives is called convexity. In this situation, the margin deposit changes its value as the price of the underlying assets fluctuates. As the Bitcoin price increases, investors’ margin in US dollars increases, allowing for additional leverage.

The problem arises when the opposite movement occurs and the BTC price collapses and consequently the users’ deposit margin in US dollars is reduced. Traders often get too excited when trading futures contracts and positive headwinds reduce leverage when the BTC price rises.

Most importantly, traders should not increase positions solely because of the delivery caused by the increasing value of margin deposits.

Isolated margin has benefits and risks

Derivatives exchanges require users to transfer funds from their regular spot wallets to futures markets, and some will offer isolated margin for perpetual and monthly contracts. Traders have the option to choose between cross hedging, which means the same deposit earns multiple positions or is isolated.

There are advantages to each option, but beginners tend to get confused and get liquidated due to not managing their margin deposits properly. On the other hand, isolated margin provides more flexibility to support risk, but it requires additional maneuvers to prevent excessive liquidation.

To solve such a problem, one should always use cross margin and manually enter a stop loss on each trade.

Beware, not all options markets have liquidity

Another common mistake involves trading illiquid options markets. Trading illiquid options increases the cost of opening and closing positions, and options already have built-in expenses due to crypto’s high volatility.

Options traders should ensure that the open interest is at least 50 times the number of contacts they wish to trade. Open interest represents the number of outstanding contracts with redemption price and expiry date that have previously been bought or sold.

Understanding implied volatility can also help traders make better decisions about the current price of an option contract and how it might change in the future. Remember that the option premium increases along with higher implied volatility.

The best strategy is to avoid buying calls and puts with excessive volatility.

Derivatives trading takes time to master, so traders should start small and test each feature and market before placing large bets.