CFDs vs Options
The CFD is a product that is considered derivative, where you get to trade based on the differences in prices that come with the financial products. While when you go with normal trades you are required to invest the full amount for that position, you’re getting an asset that is geared when you choose the CFD. This gives you the option to open a stock with a big position (the same is possible with an index or commodity), while using a percentage of the actual price as your deposit. It basically gives you the chance to either win big or lose big based on small differences.
The option on the other hand is a derivative that you can take advantage of to sell or buy a certain contract at a certain point in the future with a price that is fixed. You have that right, but you are not obligated to do so, that’s an important part of it. Both the CFD and the option are two types of instruments that are considered derivative. These can be used by traders in order to assume short positions and to take advantage of a market that is falling.
Next, you get to see some advantage of the CFDs and of the options, so you can choose knowing full well what each one brings you.
Where CFDs Do Better
You will find that for the most part it’s much easier to figure out how to use a CFD and what they’re all about. For a beginner they can be a good choice, especially since the price and the way they behave are the same as the stock they are based on (commodities, forex, shares and so on). The options on the other hand will be influenced by various things, such as the price, the time, the volatility, interest rates and dividends, making them more appropriate for advanced traders.
The financial instruments that can be accessed through the CFD allows the trader to take advantage of not only shares, but also binaries, Forex, commodities, options and stock indices. The options will be only available on a certain number of shares, so that’s another area where the CFDs are better.
The liquidity is important and that’s an area where the CFD does better, so the trader that deals in the short-term will take advantage of the movement in prices. The options on the other hand have liquidity only on some of the shares where they can be used.
If you can’t afford to trade for 1000 options at a time, the CFD contract is once again better since it can be used for 1 share if needed. The typical size of a contract for options is larger.
The option comes with an expiry date, while the CFDs have no such thing.
Hedging the portfolio is also easily done with the CFD, but more difficult if you go with options.
Where Options Do Better
If you choose to go with the options you will find that while you get the chance to sell or buy a certain contract, you are not obligated to do so. You do have to pay a premium if you give up that option, but you don’t lose everything if the market doesn’t work the way you expected it to. The disadvantage of the CFD would be that you don’t have the option to give up, instead paying the money when you’re on the losing side.
Another advantage of the option is that its risk is placed only on the costs of the broker and the premium. With the CFD you lose considerably more than that unless you have some management tools to mitigate the risk.
Which One To Choose?
It’s not always easy choosing one over the other, but that choice is not as difficult if you’re not as experienced as others, or if your situation doesn’t allow you to take the risk of a CFD. Your ultimate objectives matter as well. It is possible to reduce the amount of risk you’re taking by using certain tools, so the CFD is generally a good idea. You can use smaller contract sizes as well when you’re going with the CFDs, so you can make various experiments and see which ones work better.