Contract for difference (CFDs)
In the same way that you can trade traditional equities and forex, you can trade cryptocurrencies as CFDs through a broker. CFDs allow you to benefit whether the price rises or falls because you don’t own the “physical” asset but rather trade on price changes.
As a result of the leverage available in CFD trading, small amounts of capital can open the door to much larger trading opportunities. For instance, you can open $100,000 worth of trade with a leverage of 100:1 if you have $1,000 in your trading account. Note that leverage can boost profits, but it also raises the stakes when it comes to danger.
How CFD trading works with Cryptos
You can trade crypto CFDs in both directions after funding your CFD trading account using one of the deposit methods provided on the provider’s website or platform. To put it another way, you can profit from growing prices by purchasing low and selling high, or you can profit from declining prices by selling high and exiting when the price is low.
CFD trading differs from stock investment in that you do not become the owner of any actual assets. Contrary to this, CFDs allow investors to trade on the price movement of the tracked asset itself rather than the asset itself.
When you use CFD trading, you can make money no matter which direction the market price moves. With a “long” SHIB CFD trade, for example, if you feel the price of Shiba Inu (SHIB) will climb, you might go long and make a profit. In the same way, if you believe that SHIB’s price will fall, you can place a “short” SHIB CFD trade, and if the price falls when your trade is closed, you will profit.
Options trading
Contrary to popular belief, dealing in options is now a common occurrence on cryptocurrency exchanges. Investors can now purchase popular digital assets, such as options, in the form of major exchanges.
Options, same as futures, are derivatives because they monitor the price of an asset. Traders who are just starting out should educate themselves on the basics of options trading before engaging in the practice themselves.
Comparing trading in crypto futures or perpetual swaps with buying crypto options, investors may find that the latter have lower costs and lower risks than the former.
How crypto options work
In order to trade options, you need to do the following: Options sellers create options contracts created by an options seller, who creates call and put options. Each contract contains a “strike price” and an expiration date by which parties must settle it. Contract buyers have the right to buy or sell a tracked asset at this price when the contract expires (or earlier if it’s an American-style option).
You can choose from one of two options:
- Call: This is the right to buy the underlying asset.
- Put: Entails the right to sell the asset that is underlying the option.
Thereafter, the options seller posts the contracts on a cryptocurrency options exchange. It’s not uncommon for an option buyer to place an order on the exchange, and an option seller may choose to fill the order immediately.
Suppose you believe the ETH price will eventually reach $4,000, and you plan to invest in it. In the next month, you decide to buy a call option that permits you to acquire ETH for $3,000 (the strike price). Call option contracts are sold for a ‘Premium’, the fee you pay to buy one. Assume that the premium paid is equal to one percent of the strike price, or $40 in this instance.
You have two options when ETH reaches $4,000 on the expiration date: 1) You could put the option to use and buy ETH at $3,000, then resell the coins on the spot market for $4,000; 2) You could sell your option before it expires and make a profit due to the fact that the price of ETH has increased.
Risk management in CFDs
When it comes to trading, a key part of risk management involves maintaining strict control over your risk-to-reward ratio. It’s a popular rule of thumb among investors that you shouldn’t enter into a trade if the risk-to-reward ratio is less than 2:1.
A stop loss is another easy-to-remember risk management strategy. This is the point at which a trader recognizes that the deal has gone against them and that it is time to cut their losses. Traders specify this point when they place their trade. When it comes to averting significant losses, it works like a charm.
Risk-to-reward ratios that are carefully calculated and a predetermined stop are effective risk management techniques that traders can use for any type of trading asset, not just cryptocurrency.
Option time frame
There is an expiration date for options contracts, which tells you when you can actually use them. You can choose between two types of options: American and European. At any time prior to or on the expiration date, you can choose to exercise an American option.
When it comes to European options, the expiration date is the only time you can exercise. American alternatives are typically more expensive than their European counterparts since they provide the customer with greater freedom (but also more risk for the seller).
Days, weeks, months, and even years are all possible expiration dates. Your investment thesis has more time to develop if the expiration date is longer. Consequently, the more time elapsed until the expiration date, the more expensive the alternative.
Options premium
The premium price is subject to interest rates, expected volatility, and the current price of the underlying asset. Depending on how much the asset is worth, an option’s premium might vary greatly:
- In the money (ITM): When the strike price of a Call option is lower than the price of the tethered asset at the time of the option’s purchase, the option is said to be “in the “money” position. In reference to a Put, it occurs when the strike price of a put is higher than the current price of the underlying security.
- At the money (ATM) refers to a situation in which the strike price of a Call or Put option is the same as the current price of the tethered asset.
- Out of the money: When a Call’s strike price is greater than the underlying asset’s current price, the contract is said to be “out of the money,” abbreviated “OTM.” In the case of a Put, this occurs when the strike price is lower than the current price.
In summary
Many investors are able to trade crypto CFDs since they don’t have to possess crypto themselves. However, CFDs have leverage, which raises both profit and loss possibilities, meaning they are still potentially risky investments. Then again, compared to other leveraged securities like crypto futures or perpetual swaps, crypto options are usually a cheaper and lower-risk alternative to trade cryptocurrencies. They have the potential to be tremendously profitable if executed correctly.
