Investing > CFDs vs. Options Trading: Differences Explained

CFDs vs. Options Trading: Differences Explained

CFDs and options contracts have significant differences—but this guide will help you find your path.

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Updated March 11, 2024

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When you stop and think about it, a trading instrument is just like a new pair of jeans. 👖

When you’re shopping for jeans, you probably aren’t just ordering a random pair online from a big box store because your friend said that type worked for them. (Okay, maybe your dad does that, but it’s not ideal.)

We’re guessing you go to the store, try on several different types, figure out which is best for your body type and your jean goals (dancing? gardening? around the house?), and then choose the pair that works best for you.

While trading instruments might not have that same snug fit in the mirror, they’re just as individual to each trader as a pair of jeans. Figuring out how you want to play the stock and forex markets depends greatly on your goals, abilities, and interests. (Not so much on body type, though – that’s where our jean analogy ends.) 

As canceled IPOs increase market volatility and investors turn to foreign stocks, traders must always look out for new ways of navigating ever-changing markets. CFDs and options trading are both ways of playing the market without initially purchasing an underlying asset, there are several key differences that will make each one better for a certain kind of trader. 

In this guide, we’ll go through how CFD and options trading actually work, and which one might be the right snug fit for your unique trading style and goals.

Ready? Let’s get to it! 🚀

What you’ll learn
  • How Does CFD Trading Work?
  • How Does Options Trading Work?
  • Comparing CFDs and Options
  • Advantages of CFD Trading
  • Advantages of Options
  • Conclusion
  • CFDs vs. Options: FAQs
  • Start Trading with a CFD Platform

How Does CFD Trading Work? 🤔

First things first: what is a CFD? CFD stands for ‘Contract for Difference’. With CFDs, you’re not concerned about the actual price of an asset – instead, you’re making a trade based on the difference between the asset’s current price and its price at the time of the agreement. 

Why would you want to do this? Basically, CFDs let you gain from an asset’s price fluctuations and manage risks without ever having to own the asset itself. This makes it a “derivative product,” because you are trading something that relates to the asset, but not the actual asset itself.

You can trade CFDs by speculating whether the asset’s price will go up or down. If you think it will go up, that means you’ll sell your holding after the asset’s price increases. If you think it will go down, then you place an opening sell position, and close the position later by purchasing an offsetting trade. 

It’s worth noting that CFD trading is not legal in the US. Outside the US, investors can usually participate in CFD trading through the same institutions as their regular asset trading. 

How Does Options Trading Work? 💡

Like CFDs, options trading involves a derivative instrument. But instead of speculating on whether an asset’s price will rise or fall, options give you the right (meaning the option—and not the obligation) to buy an asset at a certain price later on. For years, options markets have been swelling thanks to minimal entry fees and high potential for profits.

There are a few different types of options, so let’s get our vocabulary straight. A call option gets you the right to buy an asset for a certain price at a later time. In the best case scenario, this would have you purchase an asset for below market value, if the price goes up.

If you think the price will go down, or you want to protect yourself in case the price of an asset you hold tanks following world events, you can place a put option, which allows you to sell at a certain price until a specific date. 

The date by which you must buy or sell the option is called the expiry. It basically just means expiration, but it sounds a lot fancier and more fun when you say expiry. 

Finally, when you purchase an option, you have to pay a cost. That cost is called the premium. If you later choose not to exercise your option, you will lose the premium. So, make sure this expense is worth it to lock in your price! 

How Do Call and Put Options Work
Options allow for numerous hedging strategies, which is why they’re usually the preferred tool of pro traders.

Options give you plenty of ways to hedge your existing investments, especially if you’re not sure how price changes might be impacted by world knews, such as Lion Group Holding’s expansion of their trading into Singapore, or Japan’s stock prices soaring after the resignation of their prime minister. But placing a put option to avoid a big loss isn’t the only way – there are basically endless strategies for trading options to make a profit and avoid bigger losses. 

Comparing CFDs and Options ⚔️

Now you’re understanding the basics of trading options and CFDs. But which one is the best pick for you? Let’s go through some key factors to determine which of these trading instruments might work best for your style. 

Which is Easier to Get Into? 🥧

Any new skill is going to require a learning curve. If you’re anxious to get started as soon as possible, just how big that learning curve is might be a deciding factor. With stocks advancing as debt ceiling fears dissipate, you might be feeling the pressure to hop into the market sooner rather than later.

We’re not going to lie to you: options are difficult to learn. It’s harder to figure out just what your reward is going to be and what your actual risk is. Plus, it’s just plain confusing to figure out what’s actually happening sometimes. If you’re not ready to learn some basics of applied mathematics, you might not be ready to dive into the world of options trading.

On the other hand, while CFDs aren’t exactly for dummies, they really don’t require all this legwork that options trading does. You kind of know what you need to know about CFDs already from this article. It’s easy to tell how they’re priced, and they don’t expire. 

However, CFDs can be risky for new traders. If an asset starts to move against you while you’re off jeans shopping (we’re sticking with this analogy), your losses will only grow as the market continues to change. 

Which is Better for Risk Management? ⚠️

So we’ve established that options trading is more complicated – and sometimes complicated isn’t good. After all, when Jim Cramer says the market is too confusing and investors should sit tight, that certainly doesn’t make things any more clear. 

But with increased complications also come increased opportunities for strategy and risk management. The opportunities to manage risk with options are pretty much limitless. 

If you want to hedge your bets, you can do something called a “straddle,” where you put a long and short option on the same asset. Either way it moves, you stand to earn a profit, as long as it’s greater than your premium on the opposing position. 

Basically, with options your risk is limited to the cost of the premium. If the market moves against you, you’ll lose that premium – which is usually considerably less than the price of the asset. This is not the case for CFDs, and CFDs do not offer similar opportunities to hedge.

Which is More Profitable? 💰

People make plenty of money from both CFD and options trading – but that doesn’t mean that any one trader will make just as much money as any others. The profitability depends greatly on your knowledge and ability to put in time and effort to turn a profit.

Young millennial woman sitting at a table with her laptop and drinking coffee while learning about the difference between CFDs and options trading.
Both CFD and options trading is very risky, with the majority of retail investors seeing a negative return on their investment.

Unfortunately, the statistics show that less than 25% of retail traders make a profit on CFDs. However, successful traders can often see a 5-10% return on their accounts. It all depends on your ability to manage risk and make good calls for the market. 

Which is Easier to Access via a Broker? 👤

It’s extremely important to have the right broker no matter what you’re trading. Make sure you work with one of the top brokers for options trading before you start planning all your fancy trading strategies.

With CFDs, it’s a little more complicated. They are not legal in the US, so if you’re based in America, you’ll need to use an international broker, and you won’t have the protections of US institutions. It’s a bit easier to access a broker if you’re based outside of the US. 

Still, there are excellent CFD trading platforms you can use to manage your trades. Just make sure you understand how your national location is going to impact your ability to profit from your trades and protect yourself well. 

Advantages of CFD Trading 📈

So, let’s get down to the basics. We’ve compared and contrasted, but ultimately different types of traders are going to choose one or the other of these trading instruments. Why might someone decide to follow the CFD star? 

Easy to Understand 💲

CFDs are very similar to trading the underlying asset – so if you understand what the asset’s doing, you understand the CFD. This means that the pricing is pretty easy to grasp.

Trade in Any Market 📊

CFDs can be traded on just about any asset – even on the prices of option premiums! You can also access international markets that you would usually not be able to trade in using CFDs. 

No Expirations 📅

While options have a certain time frame, you can leave CFD positions open as long as you like. (Though remember: markets can move against you in those time frames.) 

Use of Leverage 🏛️

Some brokers will allow you to trade with leverage, which allows you to open a CFD position for a fraction of the cost. This could increase your profits (though it could just as easily increase your losses). 

Advantages of Options 📈

Maybe now you’re sold on the idea of trading CFDs – but they’re still not your only option if you’re looking to get into trading derivative products. Now let’s go through the major advantages of trading options. 

Manage Your Risk across Your Trades 🤑

Options are a great risk management tool for many kinds of trading instruments, and you can similarly manage your risk within your options trading strategy. 

Serious Smartypants Trading 💵

There might be a learning curve to options, but that also means you can outsmart the competition and get real serious about your trading strategy, if that’s your kind of thing. 

Fixed Risk for Losses 🪙

If you purchase a premium and the market moves against you, you just lose your premium. That’s about as bad as an options loss can get. 

Conclusion 🎬

We’ve covered a lot of ground in this article, so you might see some mud stains on those new jeans! (Okay, we’ll stop with the jeans now.) If you’re just starting out and learning what CFDs and options trading are, you now have a strong enough understanding of both to decide which one you want to deep dive into. 

Remember: no trading instrument is a guarantee for profit. While we might have numbers on how many people lose or gain money, ultimately whether you make money will depend on your knowledge and skills at navigating the market. So put the time in – and start trading when you’re ready! 

CFDs vs. Options: FAQs

  • Are Options Safer Than CFDs?

    If the market moves against you on an option, you will only lose what you spent on the premium. With a CFD, your loss will grow with the magnitude of the market’s movement. 

  • Is CFD Trading Hard?

    CFD trading can be easy to learn, but still risky for novice traders and those who do not keep a close eye on market fluctuations.

  • When Do CFDs Expire?

    CFDs do not have an expiration timeframe.

  • Are CFDs the Same as Options?

    CFDs and options are both derivative products, but they are distinct. While options allow you to buy or sell an asset at a future price, CFDs speculate on the price movement of an asset, and never require you to purchase that asset in any way.

Start Trading with a CFD Platform

Fees
Average spread EUR/USD standard

Varies

1

All-in cost EUR/USD - active

N/A

0.7

Minimum initial deposit

€100

$100

General
Total currency pairs

50 CFDs

82 (in US)

Demo account?
Social / copy trading?
Rating
Fees
Average spread EUR/USD standard

1

1.6

All-in cost EUR/USD - active

0.7

0.8

Minimum initial deposit

$100

$5-100

General
Total currency pairs

82 (in US)

57

Demo account?
Social / copy trading?
Rating
Fees

Average spread EUR/USD standard

Varies

1

1.6

All-in cost EUR/USD - active

N/A

0.7

0.8

Minimum initial deposit

€100

$100

$5-100

General

Total currency pairs

50 CFDs

82 (in US)

57

Demo account?

Social / copy trading?

Plus500 Investor Warning: 82% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.

All reviews, research, news and assessments of any kind on The Tokenist are compiled using a strict editorial review process by our editorial team. Neither our writers nor our editors receive direct compensation of any kind to publish information on tokenist.com. Our company, Tokenist Media LLC, is community supported and may receive a small commission when you purchase products or services through links on our website. Click here for a full list of our partners and an in-depth explanation on how we get paid.