CFDs or options?

[yonnie]

hi folks,

dont know much about trading cfd`s or options.

when it comes to our most liquid stocks, would there be a preference to trade cfd`s or options on them?

thanks

 

[Vito]

Hi,
I am not an experienced trader, but in my opinion you can use either it really depends on your trading plan and what suits your personality.


Vito

 

[sails]

hi folks,

dont know much about trading cfd`s or options.

when it comes to our most liquid stocks, would there be a preference to trade cfd`s or options on them?

thanks

For straight directional trading, CFDs replicate the movement of the underlying share price where options are much more complex in their price structure. Without going into too much detail, it's one thing to be correct on direction and quite possible to find that the option makes very little money or even loses value.

So, without a good understanding of how option pricing works, my opinion is that CFDs would be the safer vehicle for directional trading and much easier to understand

 

[happytrader]

Hi yonnie

I find the options market is not as liquid as it used to be. I guess this is due to the popularity of CFDs. This diminishing liquidity is observable in the open interest component of stock options. However, with bought option positions your maximum loss is limited to 100% of the contract, whereas with CFDs losses can theoretically be unlimited. Especially so, if you don't use your stops.

Cheers
Happytrader

 

[rostov]

One question.

In a growing credit crunch situation as what we have right now, will lenders stop lending to derivative brokers, e.g. CMC or igmarkets? Or lend less so one's leverage is reduced much more?

 

[sails]

Hi yonnie

I find the options market is not as liquid as it used to be. I guess this is due to the popularity of CFDs. This diminishing liquidity is observable in the open interest component of stock options. However, with bought option positions your maximum loss is limited to 100% of the contract, whereas with CFDs losses can theoretically be unlimited. Especially so, if you don't use your stops.

Cheers
Happytrader

Good thing you pointed out the potential higher loss with CFDs, Happytrader. I did have the use of a guaranteed stop loss in mind when typing my reply, but forgot to add it in!

However, as I don't trade CFDs, I'm not sure how reliable the GSLs really are in case of a serious move against the position which could make the option a better choice depending on the option used.

 

[yonnie]

thanks everyone for your contribution.

yes sails, pricing of options is difficult, but perhaps there are websites that will do the calculations?

FOR OPTIONS: is the fact that you cannot lose more than your investment in options, while loss on cfd`s can be enormous

AGAINST: lower liquidity, pricing more difficult.

what about brokerage, slippage and spread?

thanks

 

[IFocus]

Hi yonnie

If you are looking at trading options directionally a couple of points although not exhaustive

Your strategy should account for volatility built into the option price ie entry when option volatility is low (hard to do but possible)

Market Makers exist and seemed to be a law until themselves (at least they were when I traded options years ago) count on slippage and wide spreads when you least want them.

Psychology wise they can be hard to trade due to the large amounts of leverage hence large profits / large losses ideally a vehicle for more experienced traders (I was told this when trading them but some how I knew better at the time)

Limited number of stocks with reasonable liquidity

A good test to see if its viable find at least 3 or 4 long term profitable traders

One last note the trading course's I have seen about options trading are in the "Scandalous money taking for making people feel good and if it worked then they would be trading it not teaching type" category (my opinion for what its worth)

CFD's with all their faults I have found to be a better option (excuse the punt) thats using a broker with DMA.

As always the strategy must fit the person / instrument / market / time frame / account size / and much more

Hope this helps
Focus

PS rostov like everything its all about profits and there is plenty in CFD's, margins may rise but that will be determined by how the lenders want to measure the risk

 

[kerosam]

just started CFD trading recently. yet to try trading options. first thing to keep in mind is cost of GSL, if you have a risk management system. second is the movement of prices. an example is RIO. it moves about $1 to $1.50 difference... sometimes $2! So entry & where to put the stop loss is important.

my two cents.

 

[sails]

thanks everyone for your contribution.

yes sails, pricing of options is difficult, but perhaps there are websites that will do the calculations?

FOR OPTIONS: is the fact that you cannot lose more than your investment in options, while loss on cfd`s can be enormous

AGAINST: lower liquidity, pricing more difficult.

what about brokerage, slippage and spread?

thanks

Absolutely yonnie, there is software to do the calculations - I never calculate them any other way. Here is a good place to start: http://www.hoadley.net/options/strategymodel.htm. Lots of good info about options on that site as well. I believe the ASX also has a free online course in options - and they have a lot of free option info on their site as well.

From a practical viewpoint, it's more about understanding how the components of that pricing may affect your trade. For example, if you buy an option that has an IV of 40% and then IV drops to 20% (definately an extreme example!), that option will lose considerable value even if the share price doesn't move Of course, the reverse is true in that if IV rises significantly, it will help the option premium.

Both put and call options have interest rates factored into them whereas with CFDs interest is paid or received daily. Dividends are also factored into option pricing. Then there is delta which tells us how quickly the option may move vs. the underlying - and then gamma tells us how much delta is likely to change as the underlying moves. So it's more than just calculating option pricing - knowing how it affects our option is relatively important - and a lot of fun if you enjoy that sort of thing!

Once one gains an understanding of it all, options are great! I really enjoy the challenge they provide. One is no longer limited to just trading direction - it gives so many more opportunities!

Bid/ask spreads vary significantly depending which option and how much liquidity there is for that option. Check out the ASX site which has delayed option quotes throughout the day http://www.asx.com.au/asx/markets/searchOptionPrices.do. Brokerage varies between firms - need to check them out to see what suits your style of trading.

Just my - hope it helps!