Underlying Futures Contract

Defining 'Underlying Futures Contract'

The term Underlying Futures Contract is a crucial part of the trading world, specifically within the realm of cryptocurrencies. This contract is the agreement made to buy or sell an asset, in this case, a cryptocurrency, at a predetermined price and specific future date.

The Basics: Understanding Underlying Futures Contracts

An Underlying Futures Contract is, in essence, an obligation. Parties involved must conform to the terms stated in the contract, whether it benefits them or not when the settlement day arrives. While it may seem quite daunting to the uninitiated, understanding this concept is key to successfully trade options with cryptocurrencies.

The Role of Underlying Futures Contracts in Cryptocurrency

In cryptocurrency option trading, the asset involved in an Underlying Futures Contract is digital currency. Traders can, therefore, use these contracts to secure a future transaction involving cryptocurrencies like Bitcoin, Ethereum, or others. The contract stipulates the terms, like the agreed price and the expiry date, the date when the agreement becomes void if not executed.

How Does an Underlying Futures Contract Work?

To understand how an Underlying Futures Contract works, imagine you're predicting that Bitcoin's value will rise in six months. Using an Underlying Futures Contract, you could agree to buy Bitcoin at today's price in six months. If your prediction is right and the value has increased, you benefit from the increased value without having to pay the increased price. However, if the value decreases, you are still obliged to the agreed price stated in the contract. Therefore, it's is a combination of prediction and risk management skills.

Why Use Underlying Futures Contracts in Cryptocurrency Trading

The use of Underlying Futures Contract in cryptocurrency trading provides traders with a measure of control and security over unpredictable market conditions. Traders can "lock-in" a price today for a future transaction, thereby mitigating the risk of unfavorable price movements. However, like any trading tool, it requires knowledge, strategic planning, and careful handling.