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CFDs vs. Options

Discussion in 'Shares' started by -T-, 18th Jun, 2006.

  1. -T-

    -T- Well-Known Member

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    Hi All

    Does anyone here have CFD trading experience and if so, can you please tell me what the advantages are over options trading?

    I understand CFDs, but I don't see what the hype is all about. Either it is just hype or I am missing something very fundamental. The way I see it:

    - options are much more flexible; you only buy or sell CFDs
    - options are more expensive, but CFDs command interest payments
    - options can be derived from more than just shares, CFDs unlikely
    - options are more liquid (I think)
    - options aren't reliant on an institution and their platform
    - CFDs holders receive the asset’s benefits, options holders don't

    If this is all there is to it, CFDs just seem like high LVR margin loans or futures. I like the idea of options because you can build genuine systems that go beyond just buying or selling.

    Anyway, I think I'm just missing something. :)

    Thanks
    -T-
     
  2. Tropo

    Tropo Well-Known Member

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    I do not have any experience with CFDs but as you know every instrument has advantages and disadvantages.
    Different CFD providers use different pricing model, processes, so CFDs contain two different structures:
    Synthetic or Direct Market Access.

    Providers who use Synthetic pricing take the base market data from the SEAT and modify it.
    You are getting bigger spread (bid/ask), so to some extent you are getting what provider is giving you. Typically (in this case) provider does not hedge his back pocket because he does not trade market. They guarantee stop loss execution.

    The Direct Access is replica of the SEAT screen so the spread is the same as per SEAT screen (no modification or adjustment to the depth ect). Main difference in relation to trading shares or warrants is possibility to sell short.
    Providers who offer Dir. Access hedge traders position. The most important limitation is luck of guaranteed stop losses, the size of order and limited stocks that can be shorted.

    CFD is linked to the share price. Unlike exchange traded options you will not acquire any rights or incur any obligations relating to the underlying share.
    IF you like derivatives consider warrants as well.
    :cool:
     
  3. Glebe

    Glebe Well-Known Member

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    Not quite Options vs CFD's, but some info on CFD's regardless. From:
    www.bwts.com.au


    At an Insight Trader users group meeting in Sydney not too long ago, I asked for your comment about CFDs . I have since investigated CFDs further and thought you might be interested in the following comments.

    I have registered with a provider of CFDs, but have not yet done any trades, because my first objective is to learn as much as I can, not only about the technical aspects of trading CFDs, but also the different psychological environment that it presents. My incentive for registering was to provide the opportunity potentially to make short trades in a falling market that I imagined might come sometime this year. It seems to me that CFDs provide minimal advantage for long trades, unless one desires to take greater risk. That is not my desire. However, by taking the same level of risk as I do with (long) share trading, that is by trading much smaller amounts and probably always placing a reverse order at my designated stop level, I have the opportunity to trade falling markets in a manner almost identical to my trading rising markets using share trading. One significant difference is that I can lose a lot more than the amount that I invest in the trade, whether short or long. That is the reason that I plan to place reversing trades to automatically activate stops, whenever I place a trade.

    However, it has become apparent that there are significant potential traps, of which only become obvious only after taking some time examining the process and the trading platform. The first is that the trading platform provides highly detailed and live information. For one used to end of day trading this can present a temptation to change ones trading timescale, or at least to monitor markets more frequently. Simple though it might appear to deal with that, it is a new psychological consideration that you have to be sure that you come to grips with. The second potential trap is that being a highly leveraged product, the analysis from a money management perspective is quite different, even though in principle the process is simple. I am taking time to develop a routine and recording system that I will be entirely comfortable with before I begin any trading. My third thought is that many people entering the CFD arena will go there without prior non-leveraged trading experience, with all the psychological conditioning, as well as technical aspects such as stock selection and entry and exit strategies, that one learns over time in that non-leveraged, and therefore significantly safer environment. The people selling the CFD product, not surprisingly, appear to gloss over this issue. Another consideration is that I am not used to trading short. Although, technically, you can trade CFDs short as easily as you can trade long, and you follow an identical process, this inverse process takes time to become comfortable with, as does anything that you do in reverse when used to doing it in only one direction. I fear that undertaking short trading without significant dummy practice to make sure you are completely comfortable with it, from stock selection through to completion of the trade, could be asking for trouble.

    My conclusion is that CFDs provide considerable potential in a falling market, but without good preparation, one's bank balance might fall faster than the market.
     
  4. Tropo

    Tropo Well-Known Member

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    I can understand that some people are not comfortable with trading short side of the market but it is possible to get use to it after short period of time.
    Anyway....Below is some basic explanation what CFD is.

    The "CFD", or "Contract for Difference", was developed to allow traders to receive all the benefits of owning a stock without having to physically own the stock itself. For example, instead of purchasing 1,000 shares of XYZ from a stock broker, a trader could instead buy a CFD on XYZ using trading platform. A $5 per share rise in the price of XYZ would confer to the trader a $5,000 profit, just as if he had purchased the actual shares that are traded on the exchange.

    A major difference is that there are no exchange fees and many of the inefficiencies of trading the underlying shares on the exchange are eliminated. Trading platform can therefore offer CFDs with zero commissions and very attractive margin requirements. The other major benefit of trading a CFD is the fact that the trader can trade on margin. CFD trading means trader can trade a full portfolio of Shares, indices, or commodities without having to tie up large amounts of capital. Using the example above, a trader purchasing $50,000 worth of CFD Shares will only be asked for $1,000 margin.
    :cool:
     
  5. Glebe

    Glebe Well-Known Member

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    So obviously no dividends. It's purely for traders huh?
     
  6. -T-

    -T- Well-Known Member

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    I thought they did get the dividend, unless you go short of course.

    So far two of my assumptions have been proven wrong.

    - I believe options on ordinary Aust shares are more illiquid than CFDs. But then again you can trade options on anything, some which are much more liquid than any share market. But still, CFDs win here for the Aust SM.
    - It seems you may be able to trade CFDs on more than just the SM.

    I'm going to buy a couple of books to read while I'm down at the snow. Hopefully that will clear up the case. Some people (with lots of cred) seem very into CFDs, so there must be something about them.
     
  7. Glebe

    Glebe Well-Known Member

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    Mate, enjoy the snow and leave the books at home! There's a time and place for everything :)
     
  8. Tropo

    Tropo Well-Known Member

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    Unfortunately no div. as far as I know. Same with FX
    :cool:
     
  9. -T-

    -T- Well-Known Member

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    Hehe, too late, just arrived back from the book shop (which didn't have much in the way of CFD books).

    The forecast looks pretty average for the mountains; rain tomorrow and possibly snowing Friday, but clear on Saturday. So a good book may be needed. We'll probably spend a lot of time down there once the base is better, so it's not a special occasion or anything; generally a couple of days a fortnight during winter. I really want to get stuck into this stuff while I'm on uni holidays, so lots of reading to do.

    The book I got:
    - "Making Money from CFD Trading", this is a write up of 3 months that the author spent trading CFDs. It details her thoughts, experiences and reflections of CFD trading. It was the only CFD book they had. :)
     
  10. Tropo

    Tropo Well-Known Member

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    "The book I got:
    - "Making Money from CFD Trading", this is a write up of 3 months that the author spent trading CFDs. It details her thoughts, experiences and reflections of CFD trading. It was the only CFD book they had "


    and the author is .....Cat Davey .... Am I correct ???::eek:
     
  11. -T-

    -T- Well-Known Member

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    I believe so... the gf also bought some books and took the lot home with her. So I haven't got it here. But I do remember it was a female author.

    The other books were:
    - "Packer's Lunch", I think it was a satirical view of top profile Australian's. Don't quote me on that though. Gf choice.
    - A charting book, Louise Bedford, also a gf choice.
    - An Australian market wizards type book, my choice but I forget the real name. I thought it would be interesting to read what traders in Aust had to say about trading and their methods.
     
  12. Tropo

    Tropo Well-Known Member

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    "I believe so... the gf also bought some books and took the lot home with her. So I haven't got it here. But I do remember it was a female author ".

    If you bought " Contracts for Difference " by Catherine Davey, so below is somebody's opinion about this book.

    "The book is written in a rather "folksy" format, with asides about the author's dog, her trading coach and psychologist. I found myself skipping over pages, then chapters, waiting for some substance. I found precious little ".
    :cool:
     
  13. Tropo

    Tropo Well-Known Member

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    You can trade CFD on shares and indices as well.
    Do not compare CFD with options. These are two different instruments.
    Each instrument has advantages and disadvantages.
    It's up to you to find an instrument which suits your personality.
    Do not forget that CFD is not an answer (like any other instrument) to successful trading IF you are unsuccessfully trading ordinary shares.
    :p
     
  14. -T-

    -T- Well-Known Member

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    Thanks for letting me know I made a great purchase! :p
     
  15. -T-

    -T- Well-Known Member

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    Yeah, noted... that's what I'm trying to work out, which instrument is for me. I've never traded ordinary shares, just options. I did well, but I put it purely down to the sustained bull market. All I think it will take is some work and discipline, it's not rocket science.

    How about this, when I've done my research (give me a couple of weeks), I'll log all of my trades here. I don't doubt I'll lose money, but I'd rather give it a go than just talk about it. :p
     
  16. Tropo

    Tropo Well-Known Member

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    It may be a great purchase for you. Try get as much as you can from it.
    If you are trying to invest money in the books try to be very selective.
    Most of the books about trading are lemons (more or less).

    A charting book by Louise Bedford is a good buy.
    She is a very good pro trader and also .... a very good looking woman - would you belive it :D
    :cool:
     
  17. perky

    perky Well-Known Member

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  18. -T-

    -T- Well-Known Member

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    Hey Perky

    I read that a couple of weeks ago and most of the CFD threads on that site. I'm onto reefcap now, getting as much info as possible. I think if CFDs aren't for me, I'll just stick with options. his was the plan from the start, but all the hype got me interested.

    We'll see though.

    -T-
     
  19. Tropo

    Tropo Well-Known Member

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    Perky,
    What I do not fully understand is why he is trying to trade CFD if he is quite successful with Forex.
    He is down 50% on his trading capital, and to recoup this may be a very difficult task.
    Also I think he was choosing wrong shares to trade from the start such as TLS (I read only few of his comments).
    Imho, it's not enough to enter the trade only because system (using black/gray box) is telling you so - unless you are trading same shares all the time (up and down).
    He should get conformation from the chart. Not every signal generated by the system is valid.
    He is trying to trade too many different markets. Not many can do it successfully.
    Well .... Good luck to him.....
    Yep .... It's a very interesting reading :D
    :cool:
     
  20. Dave

    Dave Well-Known Member

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    Im not sure if this was answered already as I skimread, but CFD players who hold a LONG position EARN dividends (often on ex-div date too depending on provider = handy), and those who hold a SHORT position PAY dividends. Additionally, LONG holders pay interest on their open position whereas SHORT holders receive interest on their's.

    The Div is the best part about them in my opinion, 5% deposit on shares that pay a 2.5% dividend = 50% return minus interest and comms.

    Check out the full examples on some CFD providers' websites such as Macquarie Bank or Man Financial.

    Cheers,