Important Information

You are visiting the international Vantage Markets website, distinct from the website operated by Vantage Global Prime LLP
( www.vantagemarkets.co.uk ) which is regulated by the Financial Conduct Authority ("FCA").

This website is managed by Vantage Markets' international entities, and it's important to emphasise that they are not subject to regulation by the FCA in the UK. Therefore, you must understand that you will not have the FCA’s protection when investing through this website – for example:

  • You will not be guaranteed Negative Balance Protection
  • You will not be protected by FCA’s leverage restrictions
  • You will not have the right to settle disputes via the Financial Ombudsman Service (FOS)
  • You will not be protected by Financial Services Compensation Scheme (FSCS)
  • Any monies deposited will not be afforded the protection required under the FCA Client Assets Sourcebook. The level of protection for your funds will be determined by the regulations of the relevant local regulator.

If you would like to proceed and visit this website, you acknowledge and confirm the following:

  • 1.The website is owned by Vantage Markets' international entities and not by Vantage Global Prime LLP, which is regulated by the FCA.
  • 2.Vantage Global Limited, or any of the Vantage Markets international entities, are neither based in the UK nor licensed by the FCA.
  • 3.You are accessing the website at your own initiative and have not been solicited by Vantage Global Limited in any way.
  • 4.Investing through this website does not grant you the protections provided by the FCA.
  • 5.Should you choose to invest through this website or with any of the international Vantage Markets entities, you will be subject to the rules and regulations of the relevant international regulatory authorities, not the FCA.

Vantage wants to make it clear that we are duly licensed and authorised to offer the services and financial derivative products listed on our website. Individuals accessing this website and registering a trading account do so entirely of their own volition and without prior solicitation.

By confirming your decision to proceed with entering the website, you hereby affirm that this decision was solely initiated by you, and no solicitation has been made by any Vantage entity.

I confirm my intention to proceed and enter this website Please direct me to the website operated by Vantage Global Prime LLP, regulated by the FCA in the United Kingdom

By providing your email and proceeding to create an account on this website, you acknowledge that you will be opening an account with Vantage Global Limited, regulated by the Vanuatu Financial Services Commission (VFSC), and not the UK Financial Conduct Authority (FCA).

    Please tick all to proceed

  • Please tick the checkbox to proceed
  • Please tick the checkbox to proceed
Proceed Please direct me to website operated by Vantage Global Prime LLP, regulated by the FCA in the United Kingdom.

×

Are you long or short on indices?

Trade Indices Now >
Long Or Short On Indices?

en

View More
SEARCH
  • All
    Trading
    Platforms
    Academy
    Analysis
    Promotions
    About
  • Search
Keywords
  • Forex Trading
  • Vantage Rewards
  • Trading Fees
  • facebook
  • instagram
  • twitter
  • linkedin
  • youtube
  • telegram
CFDs vs Options: Differences, Similarities, and Which to Choose?

TABLE OF CONTENTS

CFDs vs Options: Differences, Similarities, and Which to Choose?

CFDs vs Options: Differences, Similarities, and Which to Choose?

Vantage Updated Updated Wed, 2024 January 17 03:45

When it comes to trading, there are a variety of different options available. Two of the most popular trading vehicles are contracts for difference (CFDs) and options. 

Both have their own unique benefits and drawbacks. We will compare CFDs and options, and help you decide which one is the best fit for your trading needs.

CFDs vs Options: Which to Choose

A CFD is a good choice to trade if:

  • You use a variety of trading styles based on market conditions
  • You like the flexibility and nimbleness to get in and out of markets 
  • You are interested in taking advantage of the pure price movement of the underlying financial asset (the underlying)
  • You have no interest in owning the underlying asset

An option contract can be a good alternative if:

  • You mostly swing trade
  • Your trading strategy is good at timing the markets
  • You are not only interested in trading for potential profits, you are also interested in owning the asset if the condition is right
  • You are good at building options strategies to take advantage of a variety of market conditions

Similarities between CFDs and options

CFDOptions
Is a derivative productYesYes
Use of leverageYesYes
Can have multiple types of underlyingsYesYes

Both are Derivative Instruments

A CFD is a contract between a trader and the CFD provider that stipulates the amount to be paid when the contract is terminated. This amount is calculated by the difference between the entry and exit price of the underlying.[1]

An option is a contract between a trader and the counterparty that gives the buyer the right to buy or sell (under a call or a put option, respectively).[2]

Both Allow Leverage

Leverage for CFDs is given by the provider. Leverage in options is built into the product. 

Both Have Flexible Financial Derivatives

Both CFDs and options can have a variety of underlyings, including forex, shares and commodities, etc.

Differences between CFDs and Options

1. Trading style

CFDs work for any trading style like scalping, day-trading, or swing-trading, but options are typically well-suited for swing trading. When you trade CFDs, you are able to capitalise on the opening and closing price movements of the underlying asset without ownership.

Your account will be either credited or debited by the amount of your profit or loss, respectively. 

On the other hand, day-trading on options can be restrictive. This is due to:[3]

  • Price movement reductions – Price movement can be limited by the delta value as well as the time value element of your options premium. 

The delta value of an option is the ratio at which the price of the contract moves compared with the price of the underlying security. For example, the price of a contract with a delta value of 0.6 would move $0.60 for every $1.00 move in the price of the underlying security.

Additionally, the time value also impacts the option price movement. Even as the underlying instrument’s price increases, this gain could be undermined by the loss of time value, as an option’s price will decline over time.

  • Wider bid-ask spreads – For a specific underlying instrument (say, stocks), options markets often have lower trading volumes compared with the equity markets for the same instruments. The lower trading volumes always result in wider spreads, and this can easily affect your account balance when you day trade.

2. Market Conditions

CFDs are best suited for trending markets. On the other hand, it is possible to take advantage of any market conditions (trending up, down, or sideways) by building suitable options strategies.[4]

3. Possibility of Ownership

CFDs do not give you the possibility to own the underlying, but options do. You can exercise your rights under a call option to acquire the underlying asset.

4. How to Take Advantage of the Market

CFDs offer the possibility to take advantage of the price movement of the underlying, whereas options trading opportunities arise from intrinsic value (compare strike price versus current value of underlying) and time value (the expected volatility and time left until option’s expiration date.

5. Product Pricing

Pricing of CFDs is straightforward as prices are quoted in the same way as the underlying. However, options pricing considers both the theoretical prices using complex mathematical models as well as market forces. 

6. Transaction and Financing Costs

When trading CFDs, you incur transaction costs (fixed-ticket, bid-ask spread, or spread plus a small commission for direct market access, depending on your provider and your account type), as well as overnight swap fees. When trading options, you only pay the broker commissions. 

7. OTC v. Central Exchanges

CFDs are over-the-counter (OTC) products provided by your CFD provider, whereas some options are traded over the central exchanges (such as public company shares) and some are also OTC. 

Factors in Deciding Between CFD and Options

1. Your Trading Style

Are you a scalper, day-trader, or swing trader? Do you predominately stick to one style, or do you sometimes vary how long you keep your positions based on your market outlook? 

This is important because CFDs can give you the highest degree of flexibility for your trading style. Contrast that with the scenario where you have an option position. Closing an option position before its expiry date can sometimes lead to potentially lower returns than holding the position to expiration under ideal market conditions.

2. Market Conditions

Since the trading returns from CFDs are calculated by the difference between entry and exit prices, you would want the expected key differences between these two prices to be significantly larger than your trade risk before you enter a trade. The amount of time it takes to accomplish the price movement does not matter for CFD trading.

The same cannot be said about options trading, owing to the fact that options contracts always come with a finite time frame, your trading strategies need to not only determine the direction of the price movement, but also the amount of time it takes to get there.

This means that CFD trading is typically performed when the market is trending, whereas you can still take advantage from range-bound market conditions with options trading through different option combination strategies.

3. Trading Opportunities and Potential

Whenever there is a movement in the underlying asset’s price, there is a trading potential for CFD trading.

Options trading, however, is more complicated.

Trading options require you to build an option combination. Each combination is an options strategy that is premised upon your thesis of the market condition and your prediction of where the market is going. Because of that, you are able to build a large number of options strategies to profit from the financial markets.

Conclusion

When deciding between CFD trading and options trading, it’s crucial to consider the key advantages and differences of each financial derivative. CFD trades enable you to capitalise on the market value movements without owning the underlying asset, while options trading provides the potential to profit from predetermined price and fixed price through advanced trading strategies.

In conclusion, for short-term investors who are not interested in the long-term holding of an asset, using a CFD can potentially be an effective way to take advantage of price movements. By using leverage, investors can increase their trading opportunities while also their losses too. If you have a sound trading strategy and are looking to take advantage of market timing, options may be a choice for you to consider.

References

  1. “Contract for Differences (CFDs) Overview and Examples – Investopedia” https://www.investopedia.com/articles/stocks/09/trade-a-cfd.asp Accessed 7 Apr 2022
  2. “Options Contract: What It Is, How It Works, Types of Contracts – Investopedia” https://www.investopedia.com/terms/o/optionscontract.asp Accessed 7 Apr 2022 
  3. “Understanding Leverage – Optionstrading.org” https://www.optionstrading.org/introduction/terms-phrases/leverage/ Accessed 7 Apr 2022 
  4. “CFDs vs Options: Key Differences – Independent Investor” https://www.independentinvestor.com/cfd/cfds-vs-options/ Accessed 7 Apr 2022 
  • vantage academy open account

    Open Trading Account

    Discover the endless trading possibilities with our cutting-edge platform, designed to empower both beginners and seasoned traders alike.

  • vantage academy app

    Download Vantage App

    Trade on the go with the Vantage All-In-One Trading App, where smooth execution and market access come together in the palm of your hand.

  • vantage academy start trading

    Start Trading

    Are you an existing user? Login to your account to start trading 1,000+ products including forex, indices, gold, shares and more.