Weekly Newsletter   Challenge account   Weekly Newsletter   

What’s Your Preference: CFDs or Options Trading?

This question has dogged novice traders for quite some time: Should you trade options or CFDs? The point of departure is to understand the difference between options trading and CFD trading. Both have inherent advantages and disadvantages, depending on your trading preferences. All of these are derivative financial instruments. A derivative trading instrument is one whose price is determined by other factors.

Contracts for difference (CFDs), futures derivatives, and options prices are derived from the commodity, index, currency or stock that is being tracked. For example, a gold CFD tracks the price of the precious metal. Since there are so many unique derivative products available, it’s important to be able to quickly differentiate between them and evaluate them on their merits. Be advised that certain trading strategies and practices that may work effectively on futures contracts and options will not necessarily perform well with Contracts for Difference. Traders will do well to read the markets.com review to gauge how leveraged CFD trading can benefit you. Unlike options, you can assume a portfolio with significant asset management with CFD trading.


 · One Contract at a Time


When trading options, always remember that the option gives you the right to trade a set number of shares (typically 100 shares) by a certain date. It is possible to exercise that option before the due date. With options, the trader is not obliged to buy/sell the asset before the due date. With CFD trading, the buyer and the seller are obligated to settle the difference between the buy price and the sell price on the set date. When it comes to CFD trading, it is possible to select the size of your position from just 1 contract.
This is remarkable given the requirements in typical trading activity on bourses, and brokerages around the world. CFD trading is inherently easy to understand. With options, a premium is paid upfront, and this allows the trader to track the movement of the share/equity for a set period of time. If the trader is wrong, he/she forgoes the premium, and if the trader is right, he/she receives cash back. CFD trading is characterized by put options and call options. A put option indicates that the CFD trader believes the price will decline, while a call option indicates that the trader believes the price will rise.


 · What is Your Risk Preference?


Depending on which way the trade goes, the premium may be lost. The simplicity of CFD trading is it saving grace. It should be remembered though that CFD trading is inherently risky, and traders should be fully apprised of the benefits and pitfalls of this derivatives trading instrument. Fortunately, the pricing models with CFDs are easy to understand. They simply mirror the performance of the underlying asset. It should be remembered that the risk in options trading is limited, while with CFD trading it is substantially higher.
Luckily, you can trade a single CFD contract at a time, as opposed to a contract which has hundreds, perhaps thousands of shares in it. Options are far more complex to understand and master than CFD trades. Options routinely expire, while CFDs do not. But perhaps the best aspect of CFD trading is the wide variety of financial instruments available – upwards of 10,000 across all asset classes.


 · CFD Trading Simply Makes Sense to Newbie Traders


CFD trading is inherently easier to understand than options trading. For starters, the pricing methods are simple to comprehend. There are no time decays and no expiration dates on CFD trading. Various traders have pooled different strategies and options together to make them more attractive. This is not possible with contracts for difference. However, CFDs are unique in the number of trading instruments that are available. Thousands of stocks, commodities, indices and currency pairs can be traded in a CFD format.

These are available from markets all over the world, including the US, Canada, Britain, Europe, Asia, Australia, New Zealand and beyond. In fact, the sheer variety of CFD trading options is unparalleled – no other markets offer as much to traders. Since these are derivative instruments, you’re not purchasing the actual asset – you’re simply speculating on the price movement. Compared to options, where large positions must be purchased upfront, CFDs allow for relatively minimal investments.

Leave a Reply

Your email address will not be published. Required fields are marked *