When it comes to trading financial instruments, there are a few different types of products that investors can choose from when options trading in Australia. Two popular choices are options and CFDs, which are both available in the region. These products have unique features and benefits but also share some similarities.
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Both options and CFDs are derivative products
Options and CFDs are both derivative products, meaning they are both based on an underlying asset. The primary difference between these two types of derivatives is how they are traded. Options are traded on exchanges, while CFDs are traded over-the-counter (OTC).
Derivatives are financial instruments that derive their value from an underlying asset, meaning that the derivative’s price will be based on the price of the underlying asset. For example, if you are trading gold futures, your contract price will be based on the current spot price of gold.
You can use both options and CFDs for speculation or hedging
Traders can use both options and CFD trading for speculation or hedging purposes. When you speculate, you are taking a position in the market with the hope of making a profit. For example, if you think the price of gold will go up, you would buy a gold futures contract.
Hedging is when you take a position in the market to offset your risk in another position. For example, you might hedge your position by buying gold futures if you own a gold mine. If gold prices go down, you will make money on your futures contract and offset some of your losses from the lower spot price.
Both options and CFDs have leverage
Leverage is when you use borrowed money to amplify your returns. Both options and CFDs offer leverage, which means you can trade with more money than you have in your account. For example, if you have $10,000 in your account and use 100:1 leverage, you can trade up to $1 million.
While leverage can help you make more money, it can also amplify your losses, so it’s essential to be careful when using leverage and only trade with money you can afford to lose.
Both options and CFDs are traded online
Both options and CFDs are traded online, which means you can trade them from anywhere in the world as long as you have an internet connection. Online trading platforms make it easy to trade these products and give you access to a range of features, such as charts and analysis tools.
Both options and CFDs have fees
When you trade options or CFDs, you must pay your broker fees. These fees will vary depending on the broker you use and the product you are trading. For example, when you trade options, you will typically have to pay commissions and fees for each contract. When you trade CFDs, you will usually have to pay a spread, the difference between the buy and sell price.
Both options and CFDs are risky
Both options and CFDs are risky products, which means you can lose money if you don’t know what you’re doing. Educating yourself about these products before trading is essential, and only trading with money you can afford to lose.
Both options and CFDs require margin
You must have the money to cover the margin with Australian options trading or CFDs. Margin is the amount of money required to open a position and is typically a small percentage of the total value of the trade.
For example, if you want to buy $10,000 worth of gold on margin, you might only need to deposit $1,000 into your account, which means you are using 100:1 leverage, which can amplify your profits or losses.
Both options and CFDs have expiry dates
All options and CFDs have an expiry date when the contract expires, and the position is closed. The expiry date will depend on the product you are trading and the broker you use.
For example, some brokers might offer weekly gold options that expire on Fridays, while others might offer monthly options that expire on the last day of the month.
You must close your position or roll it over to the next expiry date when the contract expires. If you don’t, your broker will automatically close your position at the current market price.
