CFD trading and options trading have similarities such as the fact that both of them are derived from trading shares and other tradable financial assets, e.g. futures. And apart from that there is not a lot more to say about their similarities, so let’s look at how they differ from one another.
Options trading requires high analytical and financial skills and we are only going talk about the basics of it without going into too much detail about how it’s done. Option trading usually involves simultaneous trading of options and sometimes also other derivatives. Each traded option has its value determined based on multiple things, including the current share price, the date of the option’s expiry and the estimated volatility of the share price until the option can be exercised.
Unlike with CFDs, there are 2 types of options: call options (or calls) and put options (or puts). The former gives the right, or in other words the possibility, or in other words the “option”, to purchase a particular stock at a defined price called a “strike price”. The later, on the contrary, is the option to sell a particular stock at the “strike price”. Here is how a single call option works:
- The current stock price of a single “Apples and Oranges Inc.” share is 100 AUD.
- Olivia makes a call option, or buys a right to buy one share of “Apples and Oranges Inc.” with an expiry period of 1 year and a strike price of 110 AUD.
Then 1 year passes and there are possible outcomes:
|The stock price goes up||The stock price goes down|
|The stock price of a single “Apples and Oranges Inc.” share increases and becomes 120 AUD.|
Olivia decides to exercise the option she has bought a year ago and buys one share of “Apples and Oranges Inc.” for 110 AUD while its current market price is 120 AUD.
In this case Olivia makes a profit of 10 AUD as a difference between the option’s strike price and the current stock price.
|The stock price of a single “Apples and Oranges Inc.” share falls down and becomes 100 AUD.|
Olivia decides not to exercise the option she has bought a year ago because the current market price is lower than the option’s strike price.
In this case Olivia doesn’t exercise the option she has called for and doesn’t make any profit. In fact, Olivia loses money in commissions and fees she had to pay when making a call option.
Conclusion – Trading CFDs and Options Are Very Different
When you trade only one option everything is pretty straightforward. However, to be successful in options trading one has to make multiple complex simultaneous trades with options on various different stocks (or other assets). There is even more to it as you dig deeper in learning about different types of options you can trade, such as barrier options or binary options. On the contrary, CFD trading is a relatively simpler process and requires less competence in financial analysis.
To sum up, it should be quite clear now that options trading is very different from CFD trading, especially in terms of its complexity. If we helped you understand why CFD trading vs options trading is different then you are now a little bit closer to knowing how CFDs work. After you read more on the topic, making the right investment decisionsshould be intuitively straightforward to you.