Most new traders think that CFDs and Options trading are almost similar. Although they hold a couple of similarities, if you take a closer look, you will see their differences that must not be neglected as a whole. Options trading are naturally leveraged like CFD trading. Check out some notable differences between Options Trading and CFD Trading before you decide which one to use.
The Difference Between Options Trading and CFD Trading
The main difference between CFD trading and Options trading all boils down to the contract and how each one works. With CFD, you agree that there will be an exchange on the price of the underlying asset based on its opening price and its closing price. But with Options, you buy and sell the RIGHT and not the Obligation to trade the underlying asset under a fixed price.
Both of these markets allow long positions and short positions and you don’t have to own the underlying asset to trade these assets. But each of these types of trading, there are different strategies that they fit in. There are also different risks and rewards accompanied with each trade.
Benefits of CFD Trading
Transparent Pricing – The prices of CFD are particularly driven by the underlying asset’s market movement. Options, on the other hand, are being driven not just by the underlying asset but more than that. There is also an expiry to Options premiums.
Similarities On the Underlying Market – Traditionally, CFD is particularly designed to imitate the trading of the underlying asset. For instance, when buying an Apple CFD, it is the same as buying an Apple share.
No Expiries – For Spot CFD, they don’t have any sort of expiry dates, meaning you can leave your positions open any time you want. But this is not the same with Options. Your contracts will expire over a specific period of time and they will be worthless.
Leverage – In CFD, you can take advantage of leverage and margin. With leverage, you are allowed to put down a small percentage of the full amount of the underlying asset. This deposit is also known as Margin.
Variety of Markets – You can choose any market that you want in CFD. You can even trade them all together in a single account.
Benefits of Options Trading
Limited Risks – When you buy a call or put on an option, the risk in each trade is capped according to the price that you have paid on the premium.
Advanced Strategies – When you buy or write contracts, you will be required to unlock some advanced strategies in trading. There are some strategies that allow trading even during extreme volatility. You can even speculate during flat markets. This is not available on CFD not unless you utilize Option CFDs.
Hedging – A lot of traders utilize options when hedging their potential drop in portfolio. For instance, you have 100 Microsoft shares, you worry about the possible market crash but you are hesitant to sell the shares that you have. You can simply buy a put option where you can sell 100 Microsoft shares. This way, you can reduce the possible losses in case the Microsoft market really crashes.