CFDs vs. Options: 6 Major Differences

Newcomers in the trading space have flocked to many different types of financial assets, though financial derivatives like CFDs (contracts for difference) and options are the most popular ones.

Financial derivatives like these are assets that "derive" their price from a real asset, mimicking its price movement on a real chart. However, unlike "real" assets, derivatives like CFDs and options don't have to be physically owned to make a potential profit, making them attractive to newcomers.

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Key Definitions

CFD Trading

CFD trading is a financial derivative that enables investors to speculate on the future price of an asset without actually owning it.

As opposed to buying/selling a physical asset, CFDs allow traders to trade in real-time and gain exposure to both rising and falling markets. This is because CFDs allow traders to open both long and short positions without requiring them to file the necessary paperwork behind every position.

However, it's important to keep in mind that a CFD position will charge you an overnight fee for every night the position remains open. Although this fee is small, the amount can reduce your profits if you hold your position for too long.

Let's take a look at an example of a CFD trade. You deposit $400 in your trading account and you're ready to open your first position with a stock like Microsft (MSFT). You believe that due to a new product they offer, the share prices will increase, so you'd like to open a long position with 2 shares, predicting the price will go up. The price per share is currently at $200, but with 1:10 leverage, you can buy 20 shares instead of 2. After the price of the stock increases by 2% at $204, you close the position with a 40%, calculated with the following formula:

In your case, this translates to:

2 x 2 x 10 = 40% - (fees you'll incur)

Options Trading

Options trading is a type of financial derivative that allows the buyer to purchase an option, giving them the right (but not the obligation) to buy or sell a security at a specific price at or before a given date. Options have the factor of time and price, while CFDs don't.

There are two types of options contracts:

• Call options: grant the buyer the right to buy
• Put options: Grant the buyer the right to sell

At first glance, options might seem a lot more complex than CFDs, but a brief example will quickly get you to understand. Let's take the MSFT stock as an example again, where you invest $400 to buy two contracts worth 10 shares, allowing you to control $2,000 worth of shares with only $400 (similarly to leverage in CFDs). When creating your contract, you specify the expiration date on the 1st of February with a price prediction of at least $204. So, when the date comes, your position gets closed, and the profit is calculated:

Meaning:

• 2 x 10 x 2 = 40% (minus the fees, which are smaller than with CFDs).

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