CFDs Compared to Options, Futures & Covered Warrants

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A Contract for Difference VS an Option Contract

Some options are exchange-traded, while others are traded over the counter. Exchange-traded options are highly standardized products and differ from CFDs in that regard. There is also typically less counterparty risk associated with exchange-traded products. 

Just like a futures contracts, and unlike a CFD, the option contract will expire. 

With most brokers that offer both CFDs and options trading, the range of underlying assets will be much larger and more varied for the CFDs.

Option pricing is complex compared to CFD trading. While CDF prices mirror the underlying instrument, option pricing is more complicated, and options typically experience price decay as they get close to expiry. 

A Contract for Difference VS a Futures Contract

A futures contract is a legal agreement to buy or sell something (e.g. a particular commodity or company share) at a predetermined price at a specified time in the future. When you buy a futures contract, you take on the obligation to buy and receive the underlying asset when the futures contract expires. Your counterpart is obliged to provide and deliver the underlying asset at the expiration date. If the obligation can be settled in cash instead depends on the terms of the contract. 

Futures contracts are highly standardized for quality and quantity and are created to facilitate trading on a futures exchange. This sets them far apart from contracts for difference, which are not standardized and not traded on exchanges. Contracts for difference are traded over the counter. For retail CFD traders, the broker is usually also the counterpart in the transaction. 

  • Many professional traders prefer futures contracts over CFDs for index and interest rate speculation, as future contracts are exchange-traded. 
  • Many non-professional retail traders opt for CFDs over future contracts since it is easy to find small contract sizes for CFDs. 
  • CFDs do not expire; they mirror the underlying instrument as long as your position stays open. Futures contracts expire, and the price of the future will converge to the price of the underlying instrument near the expiry date. 
  • It is possible to find CFDs with futures contracts as their underlying asset. Since the futures contract will expire, there needs to be a plan for that event. The industry standard is to roll the CFD position to the next futures period when the liquidity starts to go dry during the last few days before the expiration date. Do not take this for granted; always check the T&C before you risk your money on a CFD. 

Trivia: Brokers who offer CFD trading often use futures contracts to manage their own risk through hedging.

A Contract for Difference VS a Covered Warrant

A warrant is similar to an option, as it gives the owner the right – but not any obligation – to buy a certain quantity of an underlying asset for a certain price at a certain future time. The typical scenario for a warrant is that it is being issued by a company and the underlying security is equity in that same company. A covered warrant, however, is issued by a financial institution. 

As with options, there are two types of covered warrants: the put warrant (gives the owner a right to sell) and the call warrant (gives the owner a right to buy). An investor will typically buy a put warrant if they believe the price of the underlying asset will drop and buy a call warrant if they believe the underlying asset price will increase. Like CFDs, the covered warrants make it easy to speculate on both upward and downward trends.

Generally speaking, CFDs come with lower costs than covered warrants for short-period speculation and are therefore favored by short-term traders. 

In some countries, brokers have begun promoting their CFDs as an alternative to the covered warrants issued by third-party financial institutions.

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