Options and Contracts for Difference (CFDs) have become popular trading instruments among online traders looking to trade in various markets. Both options and CFDs are derivatives, which means they derive their value from the underlying asset such as stocks, currencies or commodities. They offer investors the opportunity to trade on speculative markets without owning the underlying asset. However, critical differences between these two financial instruments should be considered by those looking to trade options or CFD.
Structure
Options and CFDs both offer different kinds of structures when it comes to trade agreements. With options, buyers purchase a contract that gives them the right but not the obligation to buy or sell an asset at a predetermined price during a specific period. CFDs, on the other hand, are trade agreements between two parties that involve the exchange of an asset at a predetermined future date and price.
Leverage
Options trading typically does not offer much leverage because they are based on options contracts which require upfront payment or deposits. CFD trading offers more leverage since traders do not have to put up money in advance. With CFDs, traders can trade more significant positions using less capital than when trading options.
Exposure
Options provide investors with limited exposure to the underlying assets as they can only trade the option contract. With a CFD trade, investors have direct exposure to the underlying assets as they trade the physical asset itself.
Risk
Options trade carries more risk than CFDs because they are based on options contracts and therefore require upfront payment or deposits. CFD trade carries less risk since traders do not have to put up money in advance.
Fees and commissions
Options trading usually involves higher fees than CFDs due to the large number of contracts that need to be traded and the associated transaction costs, such as brokerage commissions. With CFDs, trade fees tend to be lower due to the lack of upfront payments and the lesser amount of trades required for each trade.
Expiration date
Options have predetermined expiration dates, at which point they become worthless or the trade is settled. On the other hand, CFDs are typically open-ended trades with no expiration date and can be held until the trader decides to close out the trade or liquidate their position.
Liquidity
Options trading has higher liquidity than CFD trade due to the large number of contracts traded quickly. With CFDs, trade has lower liquidity as they involve fewer transactions over more extended periods.
Price movements
Options prices tend to move more significantly compared to CFD prices since options contracts have limited lives and will expire at some point. On the contrary, CFDs have no predetermined expiry dates. They can remain open for an indefinite period, thus allowing them to trade more closely with the underlying asset’s prices.
Settlement
Options trade is typically settled in cash, whereas CFD trade can be settled via the physical delivery of the underlying assets or cash payments, depending on the trade agreement between the parties.
Complexity
Options trading is a complex financial product and requires a certain level of knowledge before taking part in it. On the other hand, CFDs are considered easier to understand since they involve far fewer contracts than options and require less upfront payment or deposits.
Regulation
Options trade is regulated by the US Securities and Exchange Commission (SEC). At the same time, CFDs are typically not regulated, so there may be fewer protective measures when trading options than CFD trade.
Tax implications
Options trade is subject to different tax regulations than CFD trade. Options trades are usually taxed at the total rate, while CFDs trade can sometimes benefit from reduced taxation depending on the jurisdiction and trade conditions.
Market Accessibility
Options trade may require traders to have access to a specialized trading platform, which is only sometimes available to everyone. On the other hand, CFDs are often more accessible as traders can trade them via mainstream financial institutions or brokers who offer access to their services.
Online trading
Investors can trade options online, but they need to do so with extra caution as it is a more complicated financial product than traditional trading. With CFDs trade, investors can trade online much more straightforwardly and with less risk due to the lack of upfront payments and simplified trade conditions.
