CFD’s vs Binary Options

Binary Options appear to be the hottest new financial product around this is partly due to the fact that many of the binary option websites offer very high paying affiliate programs. I have previously been very disparaging of Binary Options (offered in the form of Binary Bets, unlike the binaries offered GFT & IG Markets). Nothing I have seen recently has changed my opinion of Binary bets/options and today I want to explain the difference between Contract’s for Difference and Binary Options (offered in the form of Binary Bets). 

How Does A Binary Option Work? 
The main advantage of a binary option as most commonly offered online is the pure simplicity. You either predict whether the price of the particular instrument is going to fall or rise over a certain period of time. Generally the period of time is anywhere between a minute and an hour, though some companies do offer longer term options. If your prediction is correct you get a flat rate payment which is displayed to you before you open your position, however if your prediction is incorrect you lose all the money you risked. This flat rate payment is generally anything from around 60-75% of the money you risk making it very difficult for a trader to make a profit in the long run something I have discussed before. The simplicity of this instrument is the main thing that attracts many people to try their hand at them.  

How Do CFD’s Work? 
CFD’s are more complicated instrument. CFD’s work like traditional financial instruments except you do not own the underlying asset your trading, rather you enter into a contract based with your Contracts for Difference provider on the price of the underlying asset. This is why a contract for difference is considered a derivative as it is derived from the underlying asset. CFD providers generally offer spreads wider than you would get if you directly traded the underlying asset allowing for the provider to make a profit in either one of two ways. Firstly, they have the option to enter into the physical markets and replicate your position making themselves a guaranteed profit due to the fact they offer a wider spread. Secondly, especially if the size of the position is particularly small they may just risk that you will win and they will have to take a loss themselves. Bucket shops never enter into open market transactions and this generally why they have much wider spreads giving them a much higher chance to turn a profit. 

Why CFD’s are a better instrument? 

  • While the majority of individuals who trade Contracts for Difference do in fact lose money. The possibility of coming out a winner in the long run is much higher than with Binary Options. Where the odds are deliberately skewed against a trader. In fact it is possible for CFD providers to make a profit from even their profitable traders as they can pocket they difference between the spread they offer and the spread on the open market. If they do enter into open market transactions however this option isn’t open for Bucket Shops. 
  • Binary Option has two outcomes either you win or you lose. However CFD’s are more complicated and allow you to close your position without losing all equity risked in a particular position. While the majority of Contract for Difference positions will not result in a return as great as 65%, it does allow you to engage in proper money management which is one of the crucial skills in being a profitable trader. 
  • As CFD’s mimic real trading much more closely, I would contend that the CFD trader would start get to a better understanding of how the financial markets work and as CFD’s are more complicated instrument it allows you to keep open positions for a longer period of time (though their are overnight costs) allowing you to a take a slightly longer term position on the markets. This makes it possible for a CFD trader to engage in a wider range of trading styles. 
  • CFD’s are the biggest over-the-counter financial instrument and this means their is a wide range of providers to choose from. Allowing you find a well regulated and professional provider to trade with. Compare this with the Binary Options, many providers operate totally unregulated and are run by fly by night individuals. While CySec has made moves to regulate the industry this hardly done much to bring many Binary Option providers into line.

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