Trading CFD and options allow traders to speculate on the price movement of an asset without physically buying or owning it. Plus, both require relatively little capital to open a trade. However, though very similar to each other, these derivatives differ in how they work.
In this blog, we’ll be explaining the differences between CFD trading vs options trading on Deriv and the advantages of trading them.
4 key differences between CFD trading and options trading on Deriv
1. The trade
CFD trading allows traders to trade on the difference between the opening and closing price of an asset. To put it simply, you speculate on the direction of the market — whether the asset’s price will rise or fall. Your potential gain or loss is determined by the price difference of the underlying asset.
Options allow traders to trade on the future value of an asset. If you anticipate that an asset’s price will rise, you place a call option to purchase it at a lower price than its market value. If you think the price will fall, you place a put option to sell the asset at a higher price than its market value. You can exercise either of these options at any time while your trade is running.
To help you better understand how call and put options work, have a read of our “What is options trading” blog.
CFDs are traded with leverage. Leverage allows you to open larger positions for a fraction of the contract’s value. It increases your market exposure and can amplify your potential gains and losses.
In an options trade, you only place your stake. If the market moves against your prediction, your loss is limited to your stake.
3. Trade duration
CFDs do not expire. A trade can continue running as long as you have sufficient funds to maintain the required margin level. Your margin is the amount of capital you must have in your account to keep your trade open.
However, trade on options runs on a set timeframe that you set yourself. For example, 3 ticks, 40 minutes, 5 days, or more.
4. Trade outcome
In a CFD trade, you’ll only know your potential gain or loss once you close your trade.
In an options trade, you know the potential payout of your trade beforehand.
Now that we’ve covered the key differences between CFD trading and options trading, let’s explore some of the advantages of trading them. So, what are they?
Two advantages of trading CFDs on Deriv
Negative balance protection
When trading CFDs, you get to enjoy negative balance protection which simply means you cannot lose more than the amount in your account. When your trade reaches the stop out level (which is set at a specified percentage), it will be closed. If your balance reaches negative, the negative balance protection kicks in, and it will be automatically reset to zero.
The stop out level refers to the point at which your trading account has insufficient funds to sustain open positions. When this occurs, your open positions carrying the biggest losses are closed automatically due to the decrease in margin level.
The margin level is the percentage of your balance and profit with margin added together. It indicates how much funds you have available to open new trades or maintain the old ones. Please note that the negative balance protection doesn’t apply to the Deriv MT5 Financial account.
Trading CFDs on assets with high volatility comes with risks. One of the main advantages of trading it on Deriv is the risk management features available, such as stop loss and take profit. Using these features, you can handle high volatility trades more effectively.
Take profit allows you to close your trade automatically as soon as it reaches the profit level you’ve set. With this feature, you decide on a specific profit to close your position in advance if the market shifts and goes against your prediction.
Stop loss works similarly, except it limits your potential losses. When the asset price reaches the stop loss level you’ve set, your trade automatically closes.
Two advantages of trading options on Deriv
In options trading, your risk is limited to your stake amount. If the market moves against your prediction, you’ll never lose more than your stake.
With options, there’s an array of choices available since it offers a greater range of contract alternatives. You can choose from 3 options contracts — digital options, lookbacks, and call/put spreads. These contracts have different conditions, allowing you to create positions you feel will be advantageous to you.
Which trade type is better suited to you?
CFD trading offers the opportunity to spread your capital across a wide range of assets, allowing you to diversify your portfolio. If you prefer low margin requirements, no fees, as well as no day-trading restrictions, this trade type is for you.
Options trading offers different strategies giving you more ways to navigate around risks. The flexibility it offers lets you recreate other positions, allowing you to generate higher potential returns from your trades. If you want to explore more ways to trade better, then this is the trade type for you.
If you’d like to explore CFD and options more, we’ve covered these trade types extensively in our “What is CFD trading?” and “What is options trading?” blog posts. But, if you’d like to practice trading risk-free, you can head straight to creating your demo account that’s pre-loaded with 10,000 USD virtual money.
The information and content posted within this blog are for educational purposes only and it is not intended as financial or investment advice.