CFD trading vs Options Trading difference explained by ForexSQ experts, Learn about the difference between CFD and options trading and choose which one of CFD trading and Options Trading works better for you to make money online.
CFD trading vs Options Trading Difference
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There are a number of different financial products that have been used in the past to speculate on financial markets. These range from trading in physical shares either direct or via margin lending, to using derivatives such as futures, options or covered warrants. A number of brokers have been actively promoting CFDs as alternatives to all of these products.
Although no firm figures are available as trading is over-the-counter, it is estimated that CFD related hedging accounts for somewhere between 20% and 40% the volume on the London Stock Exchange (LSE). A number of people in the industry back the view that a third of all LSE volume is CFD related. The LSE does not monitor the numbers but the original 25% estimate as quoted by many people, appears to have come from a LSE spokesperson.
The CFD market most resembles the futures and options market, the major differences being.
- There is no expiry date, so no time decay;
- Trading is done over-the-counter with CFD brokers or market makers;
- CFD contract is normally one to one with the underlying instrument;
- CFDs are not available to US residents;
- CFDs are not available to HK residents;
- Minimum contract sizes are small, so it’s possible to buy one share CFD, low entry threshold;
- Easy to create new instruments, not restricted to exchange definitions or jurisdictional boundaries, very wide selection of underlying instruments can be traded.
Difference Between CFD and Options
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Options, like futures, are an established product, exchange traded and centrally cleared and used by professionals. Options, like futures, can be used to hedge risk or to take on risk to speculate. CFDs are only comparable in the latter case. The main advantage of CFDs over options is the price simplicity and range of underlying instruments. An important disadvantage is that a CFD cannot be allowed to lapse, unlike an option. This means that the downside risk of a CFD is unlimited, whereas the most that can be lost on an option is the price of the option itself. In addition, no margin calls are made on options if the market moves against the trader.
Compared to CFDs, option pricing is complex and has price decay when nearing expiry while CFDs prices simply mirror the underlying instrument. CFDs cannot be used to reduce risk in the way that options can. If you want to open CFD trading account you can choose one of the CFD providers.
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