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What is the Difference Between Options CFDs and Traditional Options?
Date Modified: 26/07/2023
What are Traditional Options?
A traditional Option is a contract where the seller gives the right, but not the obligation, to the buyer to buy or sell an underlying instrument such as a commodity, stock, forex pair, index or another asset at a predetermined price within a set time period. If the underlying instrument rate doesn’t meet the Strike Price by the expiration date, the position will expire with no value. Holders have the option to buy or to sell the underlying instrument. Traditional Options give the holder the ‘option’ to decide whether or not to go through with the trade. If the trader makes the correct decision, there are more ‘options’ to buy assets at below the traditional market value.
How are Options CFDs Different?
Options CFDs are quite similar to traditional Options, however, there are a few key differences. When you trade options CFDs you are speculating on the future price (strike price) of an underlying Reference Instrument such as a stock, index or commodity.
All options CFDs offered by Plus500 are cash settled (i.e. actual physical delivery of the Reference Instrument never occurs). At the expiry of an Option CFD, cash is credited or debited to your balance based on the difference in the opening and closing price, whereas with traditional options, holders have the right to exercise the trade. This is the most significant difference between Options CFDs and traditional Options.
Illustrative prices.
Options CFDs Vs Traditional Options
Here are some key elements to consider:
Traditional Options- Exposure to significant loss potential as a traditional Call or Put Option Seller.
- Must have a minimum trading fund (which is usually large).
- Traditional Options provide opportunities for future ownership.
- The trader can pay a commission depending on the position’s size.
- Plus500 provides client risk management tools such as Stop Loss, Limit Stop, Guaranteed Stop etc.
- Trading on a CFD account has a defined “Unit Amount” per instrument, which is the minimum size of trade or number of contracts/shares etc. to open a position.
- When trading CFDs on the Plus500 platform you can only lose as much as your account balance.
- The Plus500 platform does not charge commissions on Options CFDs.
- CFD Options are leveraged, therefore you can open a larger position with the same capital (note: leverage amplifies investor gains and losses).
Final Thoughts
Options CFDs and traditional Options are quite similar. Both are derivatives, which means the value is derived from the value of an underlying asset. The most notable difference is that Options CFDs are cash settled, where traditional options can be exercised by the holder. In addition, Options CFDs are traded with leverage. Overall, you should conduct your own thorough research into both traditional Options and Options CFDs as they are complex to trade.
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Options FAQ
When you trade options you are speculating on the future price (strike price) of an underlying instrument such as a stock, index or commodity. Plus500 offers two types of options CFDs: Call option and Put option - you can Buy or Sell both types. If you enter a position on a Call/Put option, you are essentially entering a contract on the price an underlying instrument will reach (or surpass) at the expiry date.
Puts – A buyer/seller of a “Put Option” expects the price of the underlying instrument to fall/rise.
Calls – A buyer/seller of a “Call Option” expects the price of the underlying instrument to rise/fall.
For example, here is a breakdown of an option on Meta stock:
Call 125 | Nov | Meta
- Call – The option type (can be either Call or Put).
- 125 – The strike price, i.e. the price you assume the underlying instrument will surpass at the expiry date.
- NOV (November 2018) – The option’s expiry date.
In CFD trading, a popular form of day trading, your profit (or loss) is determined by reference to the movement of an option price. You are not buying or selling the option itself.
Plus500 offers a range of Call/Put options CFDs. For a list of available options, click here.
Furthermore, to learn more about Options CFDs, check out our article on "What Is Options CFD Trading."
Trading on options has some important advantages:
You can experience higher volatility – percentage changes in options tend to be much more significant, meaning they can potentially deliver greater returns (along with greater risks).
It's possible to open larger positions with lower initial margin as options' prices are substantially cheaper than their underlying instruments. For example, Alphabet (GOOG) is viewed by some traders as an expensive stock, while the price of an Alphabet option can often be much more affordable - meaning you can buy more units for the same amount of initial capital.
You can diversify your positions by trading on various strike prices. A strike price is defined as the rate the underlying instrument needs to reach by the expiry time in order for the trade to be in profit. We offer multiple Put/Call options CFDs for each underlying instrument.
Plus500 only offers trading in options CFDs. These options CFDs give you an exposure to changes in option prices, they are cash settled and cannot be exercised by or against you or result in delivery of the underlying security. Therefore, when the option CFD reaches its expiry date, the position will be closed.
Plus500’s options CFDs allow you to amplify your market exposure without the need for a larger amount of capital. With a leverage of up to 1:5, for every $1,000 you deposit you can trade up to $5,000 worth of options. Accordingly, any potential profits or losses will be multiplied.
For example, presuming the stock price of Apple is $200, while the current price of a Call option CFD for $250 (Call 250 | Nov | Apple) is $12 per option. With $120, you could open a trading position on 10 options, valued at $600:
(10 Options x Option Price of $12) x Leverage of 5 = (10 x 12) x 5 = 600.
Every option has a predefined expiry date. Typically set for one month ahead. As opposed to regular options traded in the market, Option CFDs' expiry date is set a few days before that of the underlying options. This is due to very low trading activity on the related contract at this time.
On the date of expiry, the option CFD’s last price is based on the last available rate (and not zero).
The main factors determining the price of an option include: (a) the current price of the underlying instrument, (b) the level of volatility in the market, (c) the expiry date and (d) the option’s intrinsic value, defined as the value any given option would have if it were exercised at present time.
In addition, option prices are heavily influenced by their supply and demand in the market.
Prices of options CFDs are referenced to the price movements of the options. When financial markets experience high volatility, Options CFDs’ percentage change tends to move more significantly than the underlying stock or index, due to an increase in implied volatility.
Example 1: Alphabet (GOOG) is trading at $1,000, and you buy a Call option CFD of $1,100 for one month from now at $70. Two weeks later, Alphabet’s price goes up to $1,050, and the option CFD’s price is now $90. As such, your potential profit is 90-70 = $20 per option CFD. This is equivalent to a yield of 28% (20/70 = 0.28), which is much greater than if you would have bought an Alphabet share at $1,000, and profited 5% (50/1000 = 0.05).
Example 2: Alphabet (GOOG) is trading at $1,000, and you buy a Call option CFD of $1,100 for one month from now at $70. Two weeks later, Alphabet’s price goes down to $950, and the option CFD’s price is now $50. As such, your potential loss is 50-70 = -$20 per option CFD. Equivalent to a 28% change of in the price (20/70 = 0.28), as opposed to having bought an Alphabet share at $1,000, and lost 5% (50/1000 = 0.05).