When it comes to trading leveraged financial instruments, there are several alternatives out there to choose from. I’m about to share with you my thoughts comparing the two most popular of these options-Option Trading and CFD Trading. By the time you have finished reading, you’ll hopefully be forewarned of some of the benefits and traps, based on my personal experience, successes and failures.
The stock trades up a little. This is the right direction, but the option still loses money and the investor wonders why.
I started option trading about five years ago after attending one of Nik Halik’s seminars. My initial focus to the markets was founded on a very directional approach. If I expected the share price to rise or fall and I got it right, I made money. If it did not go the way I expected, I lost money. .. Simple as that.
Of course, there’s so much to consider regarding option market maker
As time went on and I gained a deeper insight into how the options market works, it occurred to me that even when I get it wrong, more often than not, I can adjust my position so that I normally do not lose any money and can even make a profit. The one beautiful word that comes to mind when I think of option trading, is ‘flexibility’.
Consider this example: You’re looking at a chart of a stock that you have observed has been channelling between a high and low point in the last few months (or even days). It’s an upward sloping channel. This means that over the longer term, the stock is trending upwards. You see it been brought to the bottom of the channel and believe the odds are in your favour, that it will rise up again. But when it hits the bottom of the channel, it does so with a decisive downward thrust. This would usually be good reason for ‘out of the money’ call options to be under-priced, as the market is more focus on the stock falling. This makes put options more popular.
Now let us take the same scenario. However, this time you are a CFD trader. At the bottom of the channel, you probably would not dare to go long, in case the price continued to fall. So you would be required to wait until the market showed you a clear message to enter, either long or short. When trading CFDs, I have so often found myself in a position where, although my anticipation of future market direction was correct, I have been stopped out by intraday movements before the share price could get there. This is because CFDs are highly leveraged instruments, usually around 95% of the total investment is supported by the market maker. This means that a move against you is magnified 20 times. If the market makes a sudden large move against you, you are exposed to unlimited risk and can lose most of your trading capital whereas with option trading, the most you can lose is the number of one investment.
Are These Option Market Maker Facts Correct?
CFDs often appear more attractive because they’re far more liquid (easy to purchase and sell) and there are a number of more stocks, currencies and commodities you can trade them over, all in the world, and with ease, using only one market maker. But they’re also very directionally rigid. Once you are in a position, you are committed to that price direction. If you change direction, you usually lose money because you can not be committed to one direction at once. With options however, you can hold opposing positions during the same time and adjust your positions until a profit, or at least breakeven, is realized.
Give me option trading any day! They far more interesting anyway – and their flexibility and limited risk makes them a much safer way to trade.