Financial knowledge: Understanding and Differentiating Spot, Futures, and Options

The concepts and nature of these 3 basic types of trading is the fundamental knowledge that all financial investors should understand. Before investigating the differences between Spot, Futures, and Options, let us first define the basic forms of each trading type.

Spot Trading: A traditional form of trading where the buyer and seller use the current price to buy or sell a certain asset.

Spot Trading is the simplest type of trading among the three. If you want to buy an ETH/USDT token with Spot Trading, you will place a direct buy order at the current token price.

For example, if the value of one ETH/USDT token is 2,000 USD, you can place an order to buy one token at a price of 2,000 USD.

Futures Trading: A type of futures contract where the buyer and seller agree to trade a certain asset at a predetermined value at a later time. To trade Futures, investors need to go to Futures exchanges or some trading platforms that provide Futures products. In addition, Futures Trading also has leverage, which allows participants to trade with lower capital than the value of the traded asset.

For instance, if the value of a Futures contract for ETH/USDT is 2,000 USD, and the exchange offers 10x leverage, you can buy one Futures contract for ETH/USDT with only 200 USD. This means that if the value increases by 10%, you will double your profits, equivalent to 20% of your initial capital. However, if the value decreases by 10%, you will lose your initial capital.

Options Trading: A type of contract where the buyer is granted the right but not the obligation to buy or sell a certain asset at a predetermined value at a later time.

For example, if the value of a Call Option for ETH/USDT is 50 USD with a value of 2,000 USD for each ETH/USDT token, you can buy this option for 50 USD and have the right to buy one ETH/USDT token with a value of 2,000 USD at a later time. If the value increases by 10%, you can use this option to buy one ETH/USDT token with a value of 2,000 USD and sell it at a higher value, resulting in a profit for your portfolio investment.

The advantage of Options over Futures is that you have more time until the expiration date instead of risking a margin call and having your account liquidated due to market volatility. You can sell those option contracts before they expire or hold them until the exercise date, depending on which condition is profitable and beneficial for you.

Therefore, Options provide a higher profit potential than Futures, and the risk of loss is limited to the initial cost of the contract.

To summarize:

• With Spot Trading, you own the asset.

• With Futures Trading, you own the exchange rate fluctuations.

• With Options Trading, you hold the right to your contract as well as the ability to exercise that right in real time.

For those who want to start learning Options or those seeking to hone their trading skills, it is advisable to select a reputable Options exchange, such as DBOE, Deribit, Oribit, etc.

Reference: DBOE Academy

Author Bio

This is Alice, working as a Digital Marketer in Fuzzy Mark Agency as well as a freelancer, writer, blogger who is interested in Blockchain and Crypto Industry.