Deriv: CFD and Options Trading Differences
CFD and options trading allow traders to speculate on an asset's price movement without physically buying or owning it. Also, both require relatively little capital to open a trade.
However, despite being very similar to each other, these derivatives differ in how they work. We will explain the differences between CFD trading vs options trading on the Deriv platform and the advantages of trading them.
4 Key Differences Between CFDS and Options Trading on Deriv
CFD trading allows traders to trade on the difference between an asset's open and close price. To put it simply, you speculate on the direction of the market, whether the asset's price will rise or fall. Your gain or loss potential is determined by the difference in price of the underlying asset.
Options allow traders to trade on the future value of an asset. If you expect an asset's price to go up, you put a call option to buy it at a price lower than its market value.
If you think the price will go down, you put a put option, to sell the asset at a price higher than its market value. You can exercise these options at any time while your trade is running.
CFDs are traded with leverage. Leverage allows you to open larger positions for a fraction of the contract value. This increases your exposure to the market and can amplify your profit and loss potential.
In an options trade, you just place your bet. If the market moves against your prediction, your loss is limited to the amount of your bet.
CFDs do not have an expiration date. A trade can continue to execute as long as you have sufficient funds to maintain the margin level. Your margin is the amount of capital you must have in your account to keep the trade open.
However, trading in options is executed within a set time frame, which you yourself. For example, 3 minutes, 40 minutes, 5 days or more.
In a CFD trade, you will only know your potential for gain or loss once you close the trade.
In an options trade, you know the earning potential of your trade in advance.
Now that we've covered the main differences between CFDS trading and options trading, let's explore some of the advantages. So what are they?
Two advantages of CFD trading at Deriv broker
Negative balance protection
When trading CFDs, you 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 the negative level, the negative balance protection will be activated, and will be automatically reset.
The stop out level refers to the point at which your trading account does not have enough funds to hold open positions. When this occurs, your open positions with the biggest losses are automatically closed due to the decrease in the 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 keep old ones. Please note that negative balance protection does not apply to the financial account MT5 derivative.
Trading CFDs on assets with high volatility comes with risks. One of the main advantages of trading Derivatives 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 automatically close your trade as soon as it reaches the profit level you set. With this feature, you decide in advance on a specific profit to close your position if the market changes 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 set, your trade is automatically closed.
In options trading, risk is limited to your stake. If the market moves against your prediction, you will never lose more than your bet amount.
With options, there are a variety of choices available as it offers a wider range of contractual 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 that you feel will be advantageous to you.
What type of trading is best for you?
CFD trading gives you the opportunity to spread your capital across a wide range of assets, allowing you to diversify your portfolio. If you prefer low margins, no fees as well as no daily trading restrictions, this type of trading is for you.
Options trading offers different strategies that give you more ways to navigate around risks.
The flexibility it offers allows you to recreate other positions, allowing you to generate greater potential returns from your trades. If you want to explore more ways to trade better then this is the type of trading for you.
If you would like to practice risk-free trading, you can go straight to creating your demo account which is pre-loaded with $10.000 in virtual money at Derivation.
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