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 — usually, where it proves profitable to do so. In terms of practical differences, firstly the transparency of instrument pricing differs greatly between CFDs and options, with CFDs being a more accurate tracker of underlying markets than options for a number of 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, thus it is often harder to get a gauge of whether an option represents true value and a fair reflection of the underlying asset market.
CFDs on the other hand, particularly those marketed by direct access brokers, track the underlying market virtually tick for tick, because brokers are obliged to match corresponding CFD positions with live positions in the underlying asset market, as a hedge against risk and a value-added service to traders. Company Number Valutrades Limited is authorised and regulated by the Financial Conduct Authority. Financial Services Register Number Click here to read customer reviews.
The information on this site is not directed at residents or nationals of the United States and is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.
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You can use CFDs to trade a huge range of markets. IG CFD traders, for example, get access to more than 17, assets across shares, indices, forex, commodities and more.
Most options brokers will provide far fewer markets to trade. Instead of giving you the right to buy or sell a market at a set price, option CFDs enable you to go long or short on the movements of option premiums. You can trade CFDs on daily, weekly, monthly and quarterly options. When buying a call or a put option, your risk is capped at the price you paid for the premium. If the underlying market swings in the opposite direction to your trade, you can just let your option expire and you only lose the premium although this is not the case for selling options.
In a CFD trade, your losses will grow as the market moves against you. While your risk is fixed when buying options, you can still benefit from leverage. This is because the cost of buying options can be a fraction of the cost of buying or selling the underlying assets, yet any profit is calculated according to the size of the movement in the underlying market.
However, you should note that the risks involved when writing options can be much greater. This is because your profit will be limited to the premium you receive for selling the option, while losses can be unlimited if the market moves against you.
You can use a mix of call and put options — or of buying and writing contracts — to unlock advanced trading strategies. A straddle, for example, involves buying a call and a put option simultaneously on the same market. If the market moves in either direction, you can earn a profit. Some strategies enable you to trade on volatility instead of price direction, or even speculate on flat markets.
Say, for example, that you own Microsoft shares. You're worried about a possible upcoming market crash, but you don't want to sell your shares just yet. You could buy a put option to sell Microsoft shares at their current level, reducing your losses if Microsoft crashes. You can also use CFDs to hedge, however. In this example, you could sell Microsoft share CFDs.
Then, any fall in your portfolio will be cancelled by a rise in your CFD position. Whether CFDs or options are better for you depends on what you're looking for as a trader.
You can use CFDs to trade a much broader set of markets, so if choice is important to you, then you might prefer to start with CFDs. CFDs are also more transparent than options trading, as their price moves one for one with the underlying market. The extra factors that can move options prices almost make them their own distinct asset class. The added complexity of options does bring several benefits, however.
There are a vast number of trading strategies to help you find opportunity in any market conditions or to trade on volatility itself. When buying, you can also benefit from higher degrees of leverage while capping risk to your initial outlay. Open a live account to get started. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument.
IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it.
It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication.
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