Options and CFDs have a number of similarities, but there are also a number of differences.
Both financial derivatives suit their own particular purposes. You don’t own the asset but just have a position open based on the asset price. However, there are several notable differences about the way the two products are leveraged.
It’s the actual pricing of the instruments that distances any similarities. While at first look, the two instruments might seem similar.
Factors for comparison.
While contracts for difference are agreements to close out a contract for the profit or loss in the difference between the opening price and closing price of an instrument. Options are simply rights to later purchase shares or commodities at a set price. Options are bought at a fraction of the underlying asset price, and give the trader the right to later acquire the asset if he so chooses. Most often when it’s profitable. The profit portion for the trader comes in later exercising his options when the market for the asset concerned increases. Profit = Selling Price – (Buying Price + Option Price).
The transparency of instrument pricing differs greatly between CFDs and options. CFDs are more accurate tracker of underlying markets than options for many reasons. Options suffer, in the same way as futures. From a decline in their price point as their expiry looms, and indeed it is only logical that this would be the case. The value of the right to buy the shares is, after all, less valuable with less time to exercise that right in your favour before it becomes void. It is often harder to get a feeling if an option represents true value and a fair reflection of the underlying asset market.
CFDs track the underlying market virtually pip for pip. Brokers are required to match corresponding CFD positions with positions of the underlying asset market. As a hedge against risk and a value-added service for traders. This can make it far easier to follow how the pricing is laid out. The exception of certain ‘market makers’, who as brokers have responsibility to set their own spreads and price points, this presents a much more transparent and clear representation of price.
Another advantage of contracts for difference is that they are available to trade in many ways compared to options. This includes indices, exchange rates, bonds, etc. You can trade options on the basis that there is an underlying asset. While you can’t trade options in conjunction with any index or rate. Depending on which bases you are looking to trade this may or may not pose a problem. However, for new traders looking for as much flexibility as possible, contracts for difference provide wide possibilities.
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