6 Reasons Why Smart Investors Choose Options Trading Over CFD Trading

Alicia Badilla By Alicia Badilla, 15th Sep 2011 | Follow this author | RSS Feed | Short URL http://nut.bz/3g7nulnj/
Posted in Wikinut>Business>Investment

In an investment world full of choices sometimes it can be confusing as to which financial instrument best suits your needs. Here is a brief look at 2 of those choices and why investors prefer one over the other.

The Top Six Reasons Why Investors Choose Options.

Understanding the below six keys will allow you to better understand the difference between CFD and Options trading.

Knowledge is Power

Most investors if clearly given the choice would choose an investment option with pre-determined risk and unlimited profit potential over one with unlimited risk. Options have a predetermined risk where as unregulated OTC CFD’s have unlimited. The pre-paid premium of an Option is the most an investor can possibly loose while investing in Options. In many cases investors put money into unregulated OTC CFD’s only to loose more than the original amount invested.

Super Spikes & Better Stamina

It is to easy to get blown during a super spikes or super correction when trading unregulated OTC CFD’s. These type of volatile movements in the market are happening more and more frequently and if you are in the market as a CDF investor during one of these you had better hope your not on the wrong side of that trade. On the other hand Options can withstand intraday super spikes with ease without ever running the risk of having the position blown out whereas traders in unregulated OTC CFD’s have been known to have their accounts wiped out in seconds and have positions closed because of an excessive opposing intraday movement. This even includes situations where the price at the end of the trading session would have otherwise been profitable if the position had no t been blown out. Ouch!

Versatile, Adjustable, Adaptable, Flexible

CFD’s are nore of these. Options are called Options for a reason, all the rights yet not the obligations, requirements or duties that are involved in CFD trading.. Some traders refer to CFD trading as “optionless trading.” Traders can take positions in options that allow you to act as an underwriter and ergo the possibility to combine options and create countless scores of different strategies that cannot be created with unregulated OTC CFD’s . There is no corresponding position in unregulated OTC CFD’s similar to writing options.

Risk Management

Wikipedia defines Risk Management as: “the identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities. With options, there are many different ways to manage risk that are not on hand with unregulated OTC CFD’s . For example when using a straightforward long call or put, the risk is limited to the premium paid. It is impossible to lose more than you paid.

With options there are a plethora of spreads available to cap risk, each with relevance depending on the market circumstances. There are no interest payments required on a long position like there are with unregulated OTC CFD’s . Options suffer manageable time decay through using different approaches that can lessen the premium lost over time.

Friendly Dividends

In Options dividends are never your enemy. If you buy a put for a bearish position, you don't owe the dividend like you would if you were short the underlying with unregulated OTC CFD’s. If you were short a call that is assigned before ex-dividend date, you would owe the “un-friendly” dividend.

Financial Meltdowns & Armageddon

Unlike CFD’s Options do not promote Financial Meltdown and Armageddon type events. Options are regulated instruments with significant underwriting, where unregulated OTC CFD’s are essentially an OTC (over the counter) instrument, and there is a risk that the CFD provider could become insolvent, and part or all of the trader/investors' funds may be lost in this event.

The recent financial crises in America according to experts in and out of government was caused by the OTC Derivative market. This market grew to reach an estimated 600 to 1,000 Trillion as of Dec 2010.

According to most experts, without unregulated derrivatives we would not have had a financial meltdown and mortgage giants Fannie Mae and Freddie Mac would not have failed. We would not have the troubles with Greek debt and other sovereign debt. How can this Multi-Trillion dollar market be unwound? Short answer is regulation. With unregulated OTC CFD's and other similar instruments becoming more widespread it is only a matter of time before the goverment slows their existance to eventually fully regulate their continuation. Powers around the world have articulated concerns and spearheading the situation seams to be the US government. They recently commented the following as Mr Geithner testified before the House Financial Services Committee & Agricultural Committee:
“Although derivatives bring substantial benefits to our economy by enabling companies to manage risks, they also pose very substantial challenges and risks. The lack of transparency in the OTC derivative markets combined with insufficient regulatory policing powers in those markets left our financial system more vulnerable to fraud and potentially to market manipulation."

I am also a believer that more regulation will bring more sustainable growth in the Future. Recently the German Chancellor, Angela Merkel, explained that in her opinion:

“there could be no longer blank spots where regulations don’t apply in the wake of the financial meltdown”.
She was also pointing out a greater regulation for hedge funds and credit agencies that are said to have amplified the effect of the financial crisis.

The Future and Options markets are regulated. It means that there is an entity, like the CME, that trail every business deal and that provides liquidity and insurance in case of default. All contracts are standardized which bring more liquidity to the market and reduce the risk of default for investors as now you can buy/sell the contract at anytime in an open market and you don’t have to know your counter part. Another positive in the regulated market is the regulator requires a % of the total contract as a reservoir. At the end of every trading day, prices are settled and if the prices drop/increase is greater than the margin then the regulator asks the counter part to add more money to bring its margin back up (a Margin Call).

Many view the Options market over OTC products like unregulated OTC CFD’s because with options there is more transparency and less risk of default. Greedy investors have very short memories so if the OTC market continues unregulated then a financial crises in the future seams to be a certainty.


Click Here to Read More Of Alicia Badillas Wiki Pages:
The Buffet Rule Is Not Unfair
Breaking News! Gaddafi Shot In The Head:The Dictator Odyssey


Outside Links:
www.cmegroup.com About CME Group
www.visionfinancialmarkets.com
Free Gold/Silver Investment Guide

Tags

Cfd Trading, Cme Group, Gold Trading, Invest, Investment Choices, Options Trading, Price Of Gold, Trade Cfds In Australia, Trade Gold

Meet the author

author avatar Alicia Badilla
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I'm a Traveler/Writer/Investor At times I interview interesting professionals. Thank you for reading.

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Comments

author avatar vpaulose
18th Sep 2011 (#)

Informative. Thanks for your friendship.

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author avatar Mark Gordon Brown
19th Sep 2011 (#)

Lots of good information on Trading options

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