A derivative trading product is a futures contract. These are regulated trading contracts in which two parties agree to buy or sell an underlying asset at a certain price on a specific date. The underlying asset in the case of bitcoin futures would be bitcoin.
How are bitcoin futures profitable?
Most investors understand the importance of keeping as much of their coins in a cold wallet as feasible because blocking internet access to tokens greatly reduces the danger of hacking. Of course, the disadvantage is that this position may not arrive at the exchange in time, particularly if networks are busy.
As a result, when traders seek to reduce their position during volatile markets, futures contracts are the preferable vehicle. An investor can leverage their holdings by 10x by depositing a tiny margin, such as 5% of their holdings, and dramatically lower their net exposure.
After their transaction arrives, these traders could sell their positions on spot markets and close the short position at the same time. Those hoping to enhance their exposure with futures contracts should do the exact opposite. When the money (or stablecoins) arrived at the spot exchange, the derivatives position would be closed.
How does Binance’s bitcoin futures platform work?
Binance offers COIN-margined contracts, which are crypto futures contracts that are settled and collateralized in the underlying cryptocurrency. Investors, for example, can trade Bitcoin-margined contracts, which allow them to earn Bitcoin if their futures position is profitable.
Can you keep bitcoin futures for a long time?
You don’t own bitcoin directly when you invest in a bitcoin futures ETF, as you would with a stock or bond ETF. Bitcoin futures, on the other hand, are what you own.
Futures contracts are essentially wagers between two investors on the price of an item be it wheat, oil, or bitcoin at a specific point in the future (hence the name). Bitcoin futures contracts, which are traded on the Chicago Mercantile Exchange, normally have a six-month expiration date. As a result, one group of contracts expires each month, and the exchange prepares a new batch that will expire several months later.
Naturally, the price of bitcoin futures contracts can increase above or fall below the current spot price for bitcoin, depending on whether investors believe the cryptocurrency will be worth more or less in six months than it is now. However, as the contract’s expiration date approaches, the price of the contracts should converge with the market price of bitcoin, until they finally coincide on the final day.
The bitcoin ETF operates by purchasing futures contracts with expiration dates within a month or two of the current bitcoin price, which should roughly, but not precisely, mirror the current bitcoin price. As the expiration date approaches, the ETF sells the contracts that are about to expire and buys a new set of contracts that will expire in a month or two effectively “rolling” them over.
This isn’t unusual; several commodity ETFs operate in this manner. The United States Oil Fund (USO), the most popular oil ETF, invests in crude oil futures rather than crude oil. These pricing differences normally don’t amount to much over short periods of time – think days or weeks. They can, however, become important over longer periods of time, such as six months or a year, according to Hougan.
How do you make money trading futures?
The value of futures and options is determined by the underlying, which might be a stock, index, bond, or commodity. For the time being, let’s concentrate on stock and index futures and options. The value of a stock future/option is derived from a stock such as RIL or Tata Steel. The value of an index future/option is derived from an underlying index such as the Nifty or the Bank Nifty. F&O volumes in India have increased dramatically in recent years, accounting for 90 percent of total volumes in the industry.
F&O, on the other hand, has its own set of myths and fallacies. Most novice traders consider F&O to be a less expensive way to trade stocks. Legendary investors like Warren Buffett, on the other hand, have referred to derivatives as “weapons of mass destruction.” The truth, of course, lies somewhere in the middle. It is feasible to benefit from online F&O trading if you master the fundamentals.
1. Use F&O as a hedge rather than a trade.
This is the fundamental principle of futures and options trading. F&O is a margin business, which is one of the reasons retail investors get excited about it. For example, you can buy Nifty worth Rs.10 lakhs for just Rs.3 lakhs if you pay a margin of Rs.3 lakhs. This allows you to double your money by three. However, this is a slightly risky approach to employ because, just as gains can expand, losses in futures might as well. You’ll also need enough cash to cover mark-to-market (MTM) margins if the market moves against you.
To hedge, take a closer look at futures and options. Let’s take a closer look at this. If you bought Reliance at Rs.1100 and the CMP is Rs.1300, you may sell the futures at Rs.1305 and lock in a profit of Rs.205 by selling the futures at Rs.1305 (futures generally price at a premium to spot). Now, regardless of how the price moves, you’ve locked in a profit of Rs.205. Similarly, if you own SBI at Rs.350 and are concerned about a potential fall, you can hedge by purchasing a Rs.340 put option at Rs.2. You are now insured for less than Rs.338. You record profits on the put option if the price of SBI falls to Rs.320, lowering the cost of owning the shares. By getting the philosophy correct, you can make F&O operate effectively!
2. Make sure the trade structure is correct, including strike, premium, expiration, and risk.
Another reason why traders make mistakes with their F&O deals is because the trade is poorly structured. What do we mean when we say a F&O trade is structured?
Check for dividends and see if the cost of carry is beneficial before buying or selling futures.
When it comes to trading futures and options, the expiration date is quite important. You can choose between near-month and far-month expiration dates. While long-term contracts can save you money, they are illiquid and difficult to exit.
In terms of possibilities, which strike should you choose? Options that are deep OTM (out of the money) may appear to be cheap, but they are usually worthless. Deep ITM (in the money) options are similar to futures in that they provide no additional value.
Get a handle on how to value alternatives. Based on the Black and Scholes model, your trading terminal includes an interface to determine if the option is undervalued or overvalued. Make careful you acquire low-cost options and sell high-cost options.
3. Pay attention to trade management, such as stop-loss and profit targets.
The last item to consider is how you handle the trade, which is very important when trading F&O. This is why:
The first step is to put a stop loss in place for all F&O deals. Keep in mind that this is a leveraged enterprise, thus a stop loss is essential. Stop losses should ideally be included into the trade rather than added later. Above all, Online Trading requires strict discipline.
Profit is defined as the amount of money you book in F&O; everything else is just book profits. Try to churn your money quickly since you can make more money in the F&O trading company if you churn your capital more aggressively.
Keep track of the greatest amount of money you’re willing to lose and adjust your strategy accordingly. Never put more money on the table than you can afford to lose. Above all, stay out of markets that are beyond your knowledge.
F&O is a fantastic online trading solution. To be lucrative in F&O, you only need to take care of the three building components.
What is the purpose of futures contracts?
A futures contract is a legally enforceable agreement to acquire or sell a standardized asset at a defined price at a future date. Futures contracts are exchanged electronically on exchanges like the CME Group, which is the world’s largest futures exchange.
What causes CME gaps?
- Although the bitcoin futures trading products offered by CME do not trade in actual bitcoin, they do have an impact on the open market price.
- Although institutional investors are the primary users of cash-settled futures, ordinary investors can trade the “CME gap.”
- If the price of BTC on exchanges is greater than the CME closing price from the previous Friday, the price of BTC will normally fall to match the CME price. BTC’s price is likely to rise if the price is lower than the previous Friday’s CME close.
- Funds that just held bitcoin for the long term, on the other hand, outperformed funds that engaged in discretionary longing and shorting tactics in the past. As a result, investors who prefer to store bitcoin rather than trade the CME Gap should not feel left out.
- In the past, trading the CME gap has worked better in down and sideways market patterns than in bull ones.
The Chicago Mercantile Exchange is a stock exchange in Chicago, Illinois. Bitcoin Futures Markets provide an opportunity to timing the market by taking advantage of contract expirations, which occur at the end of each month. The price of bitcoin has had a strong link with these expirations during the last year. The Chicago Mercantile Exchange (CME) is the subject of this investigation, which examines how traders employ financial instruments such as futures contracts and shorting to boost their return on investment.
Brief Introduction to the CME
In late 2017, the CME, the world’s largest financial derivatives market, began trading BTC futures contracts. The futures market is essentially an auction where participants buy and sell commodity contracts for delivery at a later date. These contracts are exchange-traded derivatives that guarantee the transfer of a commodity in the future at a pre-determined price. Most commodities trade on a global scale, but bitcoin provides a one-of-a-kind circumstance. That is, bitcoin trading does not come to a halt or start at any given time. It trades 24 hours a day, 7 days a week, and isn’t bound by central time zones or exchanges…at least in principle.
Crypto BitBoy and other YouTubers frequently refer to the “CME gap,” but what does does it mean? The CME, unlike Bitcoin, does not trade 24 hours a day. The gap is the difference between the closing and opening trading prices of a CME bitcoin futures contract on Friday and Sunday. There are no trades between Friday’s closing session and Sunday’s starting period, resulting in the gap. The gap can also exist while the CME is closed for the holidays.
It’s vital to keep in mind that the gap does not have to be totally filled. From 2020 to early 2021, there are CME vacancies in the $8,000 to $24,000 range that are likely to remain fulfilled.
The last trade of the week on the CME futures market occurs at 5:45 p.m. Eastern Standard Time (EST) on Friday (or 10:45 PM London). Weekends are a great illustration of the CME gap. When the CME closes on Friday, the spot price of Bitcoin on open exchanges like Coinbase or Uniswap may be higher or lower than the spot price of Bitcoin on open exchanges like Coinbase or Uniswap. CME trading hours resume on Sunday at 6:00 p.m. EST (11:00 PM London). If the price of BTC on exchanges is greater than the CME closing price from the previous Friday, the price of BTC will normally fall to match the CME price. BTC’s price is likely to rise if the price is lower than the previous Friday’s CME close. Although it is less likely, a pattern has emerged during the last four years. It is easier to lower a commodity’s price than it is to raise it, because a rise typically requires higher trade volume to sway other market participants.
Consensus Effect: What Worked Before May Not Work Again
Every month, CME futures contracts expire on the last Friday. There has long been a claim in crypto that up to two days before these expirations, the price of BTC drops and then returns to increasing momentum. This trend does not always hold, which is most likely due to a phenomenon in macroeconomic markets known as the consensus effect. As more market participants become aware of a trend, the impact of the cause diminishes as traders try to outrun each other in the days leading up to the event. As a result, the market anticipates one reaction but gets the opposite.
For example, if the price of bitcoin increased on weekends and decreased on Monday mornings for four weeks, the market would notice this pattern and a trader would buy Bitcoin before the weekend and sell Bitcoin on Sunday. Another dealer, on the other hand, predicts that all other traders will buy on Thursday and sell on Saturday. And so on, until the pattern is no longer visible. This does not rule out the possibility of the market returning to a bear market “The consensus effect, on the other hand, means that the majority of market players would have to refrain from trading that pattern in order for it to persist. It is easy for retailers to have short memories and for institutions to be too quick to fall into their old finance and asset trading mindsets in crypto, maybe more than any other market, causing the consensus impact to be just as fickle and changeable as digital asset prices.
November 2020, February, March, April, May, June, July, August, and September 2021 demonstrate a trend of decreasing on or soon before the expiration date and rebounding shortly after, as shown in Figure 2. As the graph indicates, this isn’t always the case.
With the consensus phenomenon in mind, one technique is to take advantage of the statistical possibility that BTC expiration dates indicate a decline in the overall price of BTC shortly prior to a CME bitcoin expiration and that the price is likely to rebound afterward. When market moves are sideways, as they were from May to July of 2021, this is more likely to be a winning approach. The old adage “The phrase “the trend is your friend till the end” applies to all asset classes, but especially to price-discovery assets like bitcoin. In a downward going bear market, this can have fatal consequences because the tool used to try to profit from the broader trend is shorting, which has its own set of hazards. With an asset that is subject to price discovery, market acceptance, and macroeconomic influences like as monetary inflation, interest rates, and government laws, “The “end” component of the ancient adage mentioned earlier can occur at any time. Longing for a higher price in the future leaves one with the underlying asset but no other duty but to tie up funds and wait for prices to at least return to the levels at which they were purchased.
According to a PwC analysis on hedge funds, family offices, and high-net-worth individuals’ cryptocurrency trading methods, just keeping bitcoin for the long run beat more intricate strategies. The strategies were divided into four categories in the report: quantitative, discretionary long-only, discretionary long/short, and multi-strategy. The only-for-the-long-term technique of “During bull runs, “hodling” bitcoin outperformed other strategies (2019 and 2020). Not to mention the taxes that come with exchanging bitcoins frequently. As a result, investors who prefer to keep bitcoin rather than trade the CME Gap should not feel as if they are missing out.
Four Basic Strategies for Trading the CME Gap
There are ways to play the CME gap or contract expirations under the right market conditions without investing directly in CME futures contracts. The first two deal with the underlying asset directly. The last two are more complicated, but they’re still based on the same market information.
The first involves directly purchasing the underlying asset and longing the position. This entails buying the asset at a lower dollar price and selling it when the price rises. Buying the dip right before a contract expiration and selling it once the price rises in reference to our CME price. One of the advantages of this technique is that it relies solely on the investor spotting the drop and buying it while it lasts, rather than speculating on when it will occur. The CME expirations are predictable, so any investor who pays attention in the 48 hours leading up to the expiration can enter a position and exit if the price rises. The worst-case scenario is that the investor is forced to hold the underlying asset for longer than desired if the price does not recover.
The second type is “shorting,” which entails taking a position before the price drops. Someone who owns the underlying asset sells a certain amount of BTC at a higher price and waits for the CME to dip. The investor then buys back in with the same amount of money that they sold their original investment for, resulting in more BTC than they had before. In the worst-case scenario, the investor will have to reinvest with less BTC than they had before if the price rises.
Third, a trader can trade their position using leveraged or margin trading on a variety of exchange platforms. The trader is putting up collateral in order to borrow money in order to buy a greater stake in bitcoin at the current price, which they will then sell for a profit if the price rises. If the price falls, they can liquidate their collateral (leaving them with a zero balance on their position).
Fourth, trade on leverage using the exchange platform, but this time to short. This entails borrowing bitcoin at the present price, selling them, and then returning the borrowed bitcoin at a later date, with the assumption that the price would fall. Shorting bitcoin on margin can be advantageous since it eliminates the need to sell your own BTC and allows the trader to profit from a drop in the price of bitcoin. Several exchanges, including as Bybit, Prime XBT, Phemex, and FTX, can assist a trader in engaging in longing and shorting with leverage.
Is futures trading considered gambling?
The greatest strategy to avoid gambling in the futures markets (a futures trading gambling hybrid) is to understand a gambling trader’s thinking.
- You forego mathematics, odds-stacking, and serenity in favor of sentiment, hope, and excitementremember, hope is not a plan.
- You trade in a direction but can’t perceive the longer- and shorter-term patterns that surround the trend you’re following.
- You’re trading on a technical level without considering the bigger picture.
- You’re trading purely on the basis of fundamentals without considering the smaller or broader technical picture.
- You are trading sentiment without studying it using several indicators that can help you evaluate whether your sentiment reading is correct or not.
- You’re a poor trader if you refuse to “average down” when the fundamental and technical scenarios favor it (corollary: you’re a poor trader if you refuse to “average down” when the fundamental and technical situations favor it).
- You don’t employ enough indicators to get a variety of viewpoints on the price activity.
- You employ too many indicators, which causes your viewpoints on price activity to get muddled and your answers to become slower.
- You rely on (static) knowledge much too much, preventing your strategy from adapting to your intuitive (“gut”) decisions.
- The manner you incorporate your indicators isn’t adaptable to market fluctuations.
- You choose frequent positive payouts over infrequent negative payouts (the risk-to-reward ratio is badly skewed against you).
- You move around from trading system to trading system, without committing to one that works.
- You continue to rely on a system that has consistently failed to meet its past performance goals.
- You comprehend performance measurements but are unaware that, at your level of trading expertise, you are unable to judge them.
- Your decisions are heavily influenced by your most recent outcomes (recency bias).
- Despite evidence to the contrary, you seek reasons why your method might be correct (confirmation bias).
- You believe in a trading guru without seeing proof that he or she is profitable in the market (versus making money on your tuition).
What is the price of a Bitcoin futures contract?
Consider the following scenario for a bitcoin futures contract from the CME Group. Let’s say an investor buys two bitcoin futures contracts for a total of ten bitcoin. When the futures contract was purchased, the price of a single bitcoin was $5,000, therefore the total price for both futures contracts was $50,000. CME’s margin requirements for bitcoin futures trading are 50%, which means an investor must deposit $25,000 in order to trade. They can use leverage to fund the remainder of the contract acquisition.