Last time, we had a look at some contracts, and how they compare to Contracts for difference (CFDs). Specifically, we had a look at how forwards and futures contracts compare with them. This time around, though, we shall be having a look at how CFDs compare with options contracts.
Explaining options contracts
Options contracts are another type of derivative available to you. They are a bit more complex than the futures we examined earlier. These types of contracts are quite similar to futures, but have one defining feature. You still have a set date and price, but you do not have to go through with a trade. Therefore, if you suddenly decide a trade is not for you, you can back out. Of course, you do still have to pay a fee if you do. But this is quite a small price to pay if the alternative was much worse.
You can either put or call on an asset. A put is buying an asset and a call is selling it. Then you can either go short or long on the asset. This means you think it will either decrease or increase in price respectively.
How options compare to CFDs
Again, the main difference here is the date. You can choose when you want to trade with a CFD, but there is a single date for options. However, options allow you to drop a trade that is unfavourable to you. This allows for people to construct elaborate trade strategies with options. If one option is failing, they can get another in trading in the other direction. In this way, they can compensate themselves for any losses.
This means that CFDs tend to be much more straightforward than options. The contracts are straightforward for the trader.
CFDs do offer some options for getting out of a trade though. This would mainly be setting up a market order if need be.
CFDs are good for any asset, whereas options are generally good for stocks and indexes.
Overall then, CFDs are more flexible for a newbie trader. However, at the advanced level, options contracts are worth a look.