CFDs vs. Options

Dave ,
Thanks for an info. I didn't know about div. on CFD (I am not CFD person).

Glebe,
I am sorry I did put wrong information

 

An update on the CFDs vs options debate:

I could be wrong in some areas, but this is what I've learnt so far. So please feel free to correct me.

CFDs definitely have their place, especially in terms of Australian shares. However, I believe that CFDs are only really useful for short-term traders. The advantages are: leverage (sometimes margins as low as 3% abroad, 5% here), cost (there are holding costs, but transaction costs make them very attractive to traders) and liquidity (still issues here working with institutions, but I believe liquidity is a million times better than options on Australian shares).

Options on Australian shares (talking trading here, not just writing calls for income) become fairly expensive. The time value of volatile shares is great for someone selling, but really skews the payoff diagram for those buying. I'm sure many people make money trading options on Aust shares, but from my research it seems you'd be better of with options on futures. CFDs seem more about keeping your trading plan that you use with ordinary shares, but adding leverage and reducing transaction costs. Both are a big plus for a good trading plan.

My conclusion is that if you have a good trading system, CFDs would make trading much better than trading in ordinary shares. There is a stigma of high risk, but it's unwarranted if you have a good plan. That is, always use stops (some providers have guaranteed stops too) and concentrate on win/loss ratio rather than accuracy of decision.

As for my plan, I'm going to give CFDs a go. I want to further test my trading plan and if it looks good, then I'll go for it. I'd only risk about 2% of my capital per trade and recalculate this after each trade. That way my losses decrease as I lose more and profits increase as I make more. I'd only stick to one trade at a time too as I learn the platform and the instrument. Anyway, I'll post again once it's all set up. I think I'd like to do what that guy did on shares.com.au so I can share the experience and maybe get some guidance from those that know.

Would there be an issue with doing that on this forum?

 

I am putting some thought into using Optionetics at some point in the future. Or trying it myself - can anyone recommend some other course that doesn't cost 4k??
From what I can see, to make an option trade work - the share you trade in would have to move either up or down by 7 % - for a straddle.
The examples Optionetics gave (on Wednesday I went to a 2 hr sweetener where they try to sign you up for 4k - and a friend can come for 1.7k - so if anyone wants to share the cost pls tell me ) showed that if you buy both a put and call (so you do a straddle), you need a share to go 10% to make about a 30% profit - but if the share stays same price after 1 month then you lose 15% of the money you invested. They naturally showed examples of some shares in the US which had dropped by 20% after a bad announcement. This is the whole basis of using options - there are 27 different ways of trading options but the straddle is what they showed - buy a company (in the USA) 3 weeks before its quarterly announcements (in OZ we have half yearly announcements) , hope that the price drops or rises sharply in the next week , and get out of the trade before 1 month is up or you may end up paying more due to "time decay".
Of course if you buy a share and the price dropped or rose sharply within the first few days , then you can take your profit before the month is up.
Please anyone (Dave?) correct me if I am wrong.

 

Hey Perky

Guy Bower's options book is a must read! Only $30 or so and it really is an easy book to read. I've done quite a bit now at uni with options, but Bower makes a couple of really obvious comments that completely changed my thinking. The next book for more maths and more detail is Hull's 6th edition (sorry I can't remember exact titles).

That's odd that Optionetics pushed straddles. Sure with the example you gave (earnings announcements) it could work, but that sounds like clutching at straws. Trading options is almost all about volatility. Buy when volatility is low and sell when volatility is high. So the amount the share needs to move to make a profit on a straddle depends completely on the volatility of the share. But still, trading straddles is an expensive way to trade. Sure you can close out one side to redeem $ if you think it's going the other way, but it's virtually worthless by then.

I'm guessing that they just used straddles as an example to capture the audience. Do you know if they have a course outline somewhere?

Seriously, buy Bower's book. You'll only take a couple of nights to read it and then you'll really know the basic theory. Make sure you understand put-call parity, the determinants of option pricing and especially the role of volatility.

-T-

 

Consider two books about options:

"Understanding Options Trading in Australia - Christopher Tate
"Getting Started in Options" - Michael C.Thomsett

 

Perky,
Check this out http://www.tradingoptionsonfutures.com/

 

Thanks guys, will check them out

 

Something to keep in mind with CFDs

From what i've heard they are a completely artificial market made by the company who offers them and profitable traders have been known to been presented with bigger bid/ask spreads than non-profitable traders.

This is hear-say, but a one trader was presented with a 20 cent bid/ask spread while another less profitbale one had a 5 cent bid/ask spread on the same trade.

As I said, this is all hear-say. But its enough to have me a little weary of investmenting my hard earned into their financial instrument.

 

Thanks Qaz, I've heard that somewhere else too. There's also the issue that if you're short-term trading that anything could happen to the platform and you could miss entering/exiting positions. I know that could happen on the ASX/SEATS/etc, but to have the "other side" running the platform seems less reliable.

Thanks again
-T-

 

I've heard this story too.
Most of them are true stories. I would not consider CFD as an investment vehicle but as a short term trading instrument.
Do not expect a fair play when big money is in motion.

 

Qaz, I think that's how CFD's first started out a decade ago. Due to competition, they all have DMA - Direct Market Access, thesedays.

T, The platforms of the major players are fairly reliable.

Tropo, the problem with them as an investment vehicle is that (unlike margin loans) the interest is charged on the whole open position. They are a good short term trading instrument, due to their leverage and small brokerage cost ($10 vs $25 for shares).

 

Thanks Dave !

I was not aware that they charge interest on the whole open position what s**** imho.
Even $10 brokerage cost (as you said) added to the interest on the whole open position make CFD even less attractive to me. I never consider CFD as a viable instrument to trade. But that is only my opinion.

 

There are no franking credits with CFD's. Exdiv shares have a tendency to drop div + fc so I can't think of a good explanation as to why a dividend trader would trade CFD's.

FX trades replicate real interest payments accurately in my very limited experience with them on IG.

There are issues about market making which would encourage me to consider 'fixed risk' at all times with equity trades if I return in the future. I have had some unpleasant experiences with not being able to trade as stocks gapped below your stops o/n. Also I have had other experiences which reminded me how much in their power you are.

It's difficult to take anybody seriously once they mention they are trading index futures and the like with CFD's as well, IG started with 3 and 5 point spreads for their SPI equivalent contract, competition or a decimation of their retail client base with the current market has forced them into 2 point spreads last I checked. Other contracts are similarly exhorbitant.

CFD's have their good and bad points like most things. We will no doubt hear some very interesting horror stories emerge about them when the market turns (a -1% quarter or so doesn't qualify yet!) I have already seen a few stories surface. I think you will see a lot of these stories emerge as CFD's are being targeted very heavily at precisely the sort of people who shouldn't be trading them. But that's the free market I guess.

 

We are actually quite happy (and a bit surprised) at how we have gone trading CFD's so far.
It has a lot to do with discipline (setting stop/losses - something I never did with ordinary shares and did not do quite so well with them) ; also having watched and learnt over the last 12 months we are much more comfortable trading now.
CMC markets spreads are pretty much 1c spreads, which is good. $10 commissions are fairly priced.
One day I might write up a diary of my trades on here, if I can get around to it.

 

Perky I think we'd all learn a great deal from that if you could do so.