Most of the beginners now a days preferring ‘Options’ trading mainly ‘Options Buying’. The main reason behind this is higher return against lower capital requirements and the second reason is the reduction of leverage in intraday trading.
“Although the rate of profit is very high in options buying but the risk factor is also similarly very high and the time decay in the option premium is another big risk in making reasonable profits. And as it is a derivative contract, sometimes the move of premium is not in actual proportionate of the underlying and the fluctuations badly impact the ‘risk reward ratio’.”
In this article we will discuss my view about why I prefer crypto trading than the options trading and the pros and cons of crypto trading.
Pros of crypto trading :
Market timetable
The main reason that most of the traders who prefers Commodity & Crypto trading is the market timetable. As we all know our stock market runs from 9.15am to 3.30pm for which those who have some job or business, they could not trade properly during this market hour. But commodity market runs up to 11.55pm and crypto market is runs 24×7, that is always open. So we can trade according to our comfortable time.
And another factor important in my view is, as it is always open, so the fluctuations due to gap-up and gap-down opening and volatility in the starting and ending half-an-hour does not happens in the crypto market. If we notice, most of the time the major move in stock market happens during these hours and which if a beginner could not capture. And also if he tries to capture then the risk is very high and could make huge losses.
Capital requirement & Leverage benefit :
We all know that since last few years, the market regulator SEBI has reduced the leverage benefit to maximum five times (5X) for intraday trading. So inorder to make minimal profit of 500 to 1000 also, we have to deploy capital in lakhs. Therefore most of the retail day traders sifted to ‘options buying’ market where we can trade one lot with a capital of 10 to 15 thousand only.
But if we calculate the price of one lot stock or index is approximately equals 10 lakhs. So here the leverage is near to 100 times (100x), which is very risky, although profit is also higher. And in options trading we trade the Options Premium amount which moves according to the movement of the underlying stock or index.
But the price movement is always not in actual proportionate to the price move of the underlying, because there are several other factor like decay of premium until the expiry that is time decay, increase and decrease of premium due to volatility etc. and if you have noticed, most of the time trader make huge loss due to sudden spike or fall in premium due to speculations also.
So the risk-reward ratio of option buying is very less. Making small profit within minutes by scalping is very easy in option buying if trade move in our favor but making big losses within minutes if trade move against us is also very easy which most of the beginners make in option buying.
In order to overcome these risk factors, ‘futures trading’ is a better choice, because here we trade the price not the premium amount and we can properly analyse the price movements without fear of any external factors like delta, theta, gamma etc. But for ‘futures’ we need very high margin amount, because we don’t have any leverage benefit. We require aprox 1.5 to 2 lakhs per lot, so here we get five times (5X) leverage benefit only and chances of profit margin is very low, that is merely 1%.
And if we go for ‘options selling’ then here we get benefit of time decay but profit ratio is lower than ‘futures’ and capital requirement is similar to ‘futures’. So beginner retail traders who often don’t want to take higher risks and comes with few thousands of funds, could not trade in ‘futures’ and ‘option selling’.
But in crypto market there are various types of leverage option we have like 5x, 10x to 100x also. And there is no requirement to trade in lots in case of ‘Crypto futures trading’. We can trade with very small amount of few hundred also. Although the brokerage and charges are little higher but if we trade with few thousands then also could earn decent profits.
Risk management & Money management :
As we have discussed above about the risk-reward ratio in ‘options buying’ is very high. We make small profits when trade moves in our favour but makes huge losses when trade goes against us. Because there are various other factors, except the price, which moves the premium price. Sometimes a small move may hit our stoploss and a big move also may not recover us from our stoploss or may not achive our target profit. In sideways market rarely we get any trade with 1:2 or 1:3 risk reward ratio.
So here risk management is very difficult, we could not manage our risk properly. With ‘futures trading’ we can at least manage our risk reward ratio, but margin requirement is very high, so in it money management is the main problem.
But in ‘Crypto futures trading’ we have various leverage options to choose like 5x to 100x. So we can manage our risk and take leverage according our risk taking ability. And here no requirement of minimum lot size, so we can trade crypto futures with less capital also.
Most of the beginners who don’t know properly about technical analysis, chart patterns, support-resistance and price action needs to practice trading with small amount for learning purposes. So crypto trading is a better option for them for risk management, money management and to learn and practice.
Cons of crypto trading :
Regulations & process : Ease of doing
If we think about ‘Ease of doing’ factors that is demat cum trading account opening, funds adding and withdrawing etc. then stock market is a better option. Because we have a lot of discount brokers like Zerodha, Upstox, Fyres, Angel One with whom we can open account easily and trade with very minimum brokerage and charges. Funds adding and withdrawing process is also very easy, transparent and safe.
In case of Crypto market, although there are so many app through which we can buy and sell crypto currencies like Wazir-x, Coin Switch Kuber, Coin-DCX etc but for trading we have only few exchanges where we can trade like Binance, Delta Exchange etc.
And the major problem is adding and withdrawing funds. As we cannot trade crypto with Indian Rupee (INR), we have to purchase any crypto currency like Bitcoin, Etherium or USDT, and due to various restrictions of RBI and banking regulations, we cannot directly add money in our crypto account and purchase crypto.
So we have to purchase in P2P mode, in which we purchase from another person and pay them directly. Although we perform the P2P buying or selling process within the platform of the broker or exchange but the payment method is directly from person to person, and sometimes people lose their money due to various scammers, if they don’t know about the process properly. Besides this all the process of trading will happen within the exchange, so there is no risk of scam by any external person.
Another risk in crypto market is, till now there is no regulator for crypto markets like we have SEBI for stock markets. So we have very limited options to claim or raise complain in case of any fraudulent activity happens. So we could not trade or invest very big amount in cryptos. And there are so many restrictions and higher taxations are implemented on crypto trading. These are the biggest cons or drawbacks of crypto market trading.
That is all about my views, in case of beginners to learn, practice trading and then trade according to their ability, consistency and capital for a better wealth creation.
