What is CFD trading?

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A Contract for Difference (CFD) is a financial derivative that allows traders to speculate on the price movements of various markets—such as stocks, indices, commodities, forex, cryptocurrencies, and derived indices—without owning the underlying asset. In CFD trading, you enter into an agreement with your broker to exchange the difference in the asset's price from when you open the trade to when you close it. 

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CFDs are available on platforms like Deriv MT5, Deriv cTrader, and Deriv X.

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How do CFDs work? A trading perspective

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Let’s say you believe the price of an asset will rise. You can open a trade by placing a buy order for that asset. If the price increases as you expected, you close the trade with a sell order, and the difference between the buying and selling prices is your profit. This strategy is known as going long in CFD trading.

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Going Long in CFD Trading: When you go long in CFD trading, you’re speculating that the price of an asset will go up. For example, if you buy a CFD at $100 and later sell it at $110, the $10 difference per unit is your profit.

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On the other hand, if you think the price of an asset will decrease, you can open a trade with a sell order. When the price drops, you close the trade by placing a buy order at the lower price, profiting from the difference. This approach is called going short in CFD trading.

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Going Short in CFD Trading: Going short might seem counterintuitive because you start with a sell order even though you don’t own the asset. But in CFD trading, you’re trading the contract, not the underlying asset. A sell order here means you’re predicting a price decline. For example, if you sell a CFD at $110 and buy it back at $100, the $10 difference per unit is your profit.

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The role of margin in CFD trading

When trading CFDs, you don’t need to pay the full value of the trade upfront. Instead, you deposit a small percentage of the total trade value, known as the margin. This allows you to control a larger position with a smaller amount of capital, a practice known as trading on margin or leveraged trading.

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While this can amplify your profits, it also increases your potential losses. Let’s break it down with an example.

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Suppose you want to buy CFDs on Apple stock, which is currently priced at $210 per share. You believe the price will rise, so you decide to buy 10 CFD contracts. If the broker requires a 10% margin, you only need to deposit 10% of the total trade value as your position margin.

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How to calculate CFD margin

• Total Trade Value: $210 (price per share) × 10 (number of CFD contracts) = $2,100
• Position Margin: 10% (margin rate) × $2,100 (total trade value) = $210

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Now, if the Apple stock price increases to $215, the new total value of your trade would be:

• New Total Value: $215 × 10 contracts = $2,150

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If you close the trade at this point, your profit would be:

• Profit: $2,150 (new total value) - $2,100 (initial value) = $50

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However, if the price drops to $205, the new total value of your trade would be:

• New Total Value: $205 × 10 contracts = $2,050

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If you close the trade at this point, your loss would be:

• Loss: $2,100 (initial value) - $2,050 (new total value) = $50

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This loss is less than your initial margin of $210, so it does not exceed it. However, if losses were larger, they could exceed your margin deposit, illustrating the risk involved in leveraged trading where price movements can lead to significant losses relative to your initial investment.

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What is options trading?

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Option trading allows traders to speculate on the price movement of various markets by buying and selling contracts based on whether they think the price of an asset will rise or fall. You don’t need to own the underlying asset; instead, you enter into contracts that give you the right to either buy or sell at a predetermined price within a specified time frame.

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Options are available to trade on Deriv Trader, Deriv Bot, and Deriv GO platforms.

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How does option trading work?

When trading options on Deriv, you are not buying the underlying asset but instead trading contracts based on your price predictions. Losses are limited to your initial investment.

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The main types of Options offered in Deriv are:

• Digital Options: Digital Options allow you to predict the outcome from two possible results and earn a fixed payout if your prediction is correct. 
• Accumulator Options: Accumulator Options amplify your profit with up to 5% compounding growth per tick when the market price stays within a specified range.
• Vanilla Options: Vanilla Options let you predict if the market price will be higher (Call) or lower (Put) than a target price at the end of the contract. The more the market moves in your favor, the higher your payout.
• Turbo Options: Turbo Options let you predict if the market price will stay above (Up) or below (Down) a barrier during the contract. The further the price moves in your favor, the higher the payout based on your chosen payout per point.
• Multipliers: With Multiplier Options, you select a multiplier (up to 2,000x) and predict if the market price will rise or fall from the entry price. Your payout increases as the price moves in your favor, amplified by the multiplier.

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CFDs or options? Key trading differences

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• Leverage: 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.

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In an options trade, you only place your stake. If the market moves against your prediction, your loss is limited to your stake.

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• 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.

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However, trade on options runs on a set timeframe that you set yourself. For example, 3 ticks, 30 minutes, 5 days, or more.

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• Profit Potential: With CFDs, your profit potential is based on the difference between the opening and closing prices of your positions. This potential can be significantly amplified by leverage, meaning that even small price movements can lead to substantial gains or losses.

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In contrast, options trading offers profit potential based on the contract terms and how accurately you predict the market movement. You can earn a payout if your prediction aligns with the market movement, influenced by factors like the extent of the movement and the specific option type you choose.

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• Risk Exposure: In CFD trading, your risk exposure can be substantial due to leverage, as losses may surpass your initial investment. 

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In contrast, options trading caps your risk exposure to the stake invested, meaning your maximum loss is limited to the amount you put into the option.

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• Trade Outcome: The profit or loss in CFD trading is determined only when the trade is closed, based on the asset's price movement.

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Whereas, in options trading, you often have a clearer idea of potential payout beforehand, especially with fixed payout options, though some options still offer variable payouts based on market movement.

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Which trade type is better suited to you?

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CFD trading lets you diversify your portfolio with low margin requirements and no day-trading restrictions, making it suitable for those seeking flexibility and control over large positions.

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Options trading offers a range of strategies to manage risk and optimize returns. You often have a clear idea of potential returns, especially with fixed payouts, but some options also offer variable returns based on market movements.

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Choosing between CFDs and options depends on your trading style, risk tolerance, and objectives. CFDs are ideal for broad market exposure, while options are better for structured risk management and tailored returns.

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If you’d like to explore CFD and options trading further, you can create a demo account pre-loaded with 10,000 USD in virtual money to practice trading risk-free.