Options vs. CFDs

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Options vs CFDs

There are a number of factors to take into account when trading options. Trading options is less risky than trading Contracts For Difference (CFD’s) as your risk (maximum loss) is known when entering a trade and you have the same upside potential. It is possible to trade options on overseas index, US shares, futures and foreign exchange. Options allow you to trade directional and non-directional strategies and allow flexibility in your trading. There are only ETO’s on a limited number of ASX stock which can be a good thing as all stock that are covered are blue chips which provide greater liquidity. An example of options flexibility is that we have been able to buy puts while short selling has been banned and affected CFD traders. With options, we can also set up a synthetic short – buy a call option and sell a put option at the money. Synthetics shorts are not covered in this course but you can email me for more information on this topic.

CFD trading has a number of advantages and disadvantages. With CFD’s you can place a stop loss but there is a risk of gapping. Gapping refers to when a stock closes in the afternoon and opens the next day at a price that is lower than your stop loss. This is common when there is a particularly big overnight move in the US. When trading CFD’s there is no expiry date, instead an interest expense is incurred over time. An advantage is there are CFD’s on smaller stocks which may not be traded on options at all. Day trading CFD’s minimises the risk of gapping to a certain degree. The main risk with day trading is intra-day trading halts due to company announcements but it does eliminate the risk of overnight movements.

To receive ASX Option Recommendations or to learn more about trading options please request the complete Introduction to Options Trading eBook by contacting us on 1300 368 316 or info@totaloptions.com.au