Are CFDs and Options the same thing?
No, despite some ostensible similarities, CFDs (Contracts for Difference) and Options are not the same thing. In broad terms, Contracts for Difference are a contract to settle the difference between the opening and closing price of an underlying asset over a timeframe. Options are the right but not the obligation to buy (or, for a put option, to sell) an asset for a predetermined price at a specific date. CFDs and Options are both valid alternatives for leveraged trading.
Both CFDs (contracts for Difference) and options involve the potential for leverage. Typically CFDs are OTC (over the counter, see my article here for more information on the term and how it relates to CFDs) whereas options are standardized and offered through exchanges (thought this is not always the case). Both instruments allow you to go ‘long’ or ‘short’ on the market, hence allowing you to take advantage of price movements if you believe you know which way they are heading. This, combined with the possibility of leverage, make both CFDs and Options powerful means to profit from price movement. Of course, this is a double-edged sword, as price movement can go either for or against your prediction, resulting in profit or loss.
CFDs or Options?
I’ve listed some of the benefits and detractions of these two financial instruments to help answer the question of CFDs vs Options below. This also helps illustrate the CFD options difference in case you’re still not sure.
Some of the benefits of CFDs over options are:
-No fixed expiry date
-typically higher leverage is available
-wider choice of markets
-pricing is relative to underlying asset
And conversely, some of the benefits of Options over CFDs are:
-risk of loss capped at what you paid for the option
-Can be mixed into a number of advanced strategies
-Can be used for hedging
Which is better for you – CFDs or Options?
As always it’s entirely up to your personal situation. Both CFDs and Options carry risk and reward; it’s critical that you understand these before you attempt trading either. Many CFD providers offer ‘demo’ accounts where you can trade imaginary funds to help learn and see how you would fare with the strategies you implement (see this review of Plus500 features for more information about such an account.) Depending on your technical bend, you will probably find trading CFDs easier to get your head around if you are starting out. Be aware, however they could be considered more risky as it is possible to lose more than your initial deposit while trading CFDs. Typically, options are paid for up-front and expire at a set date, but as they get closer to their expiry date they lose some of their value due to ‘time-decay’, because likely price movement diminishes with less time remaining on the option.