Listed options vs CFDs in the UK
A listed option is a contract traded on a regulated exchange. Listed options involve buying or selling specific underlying security, commodity, or currency at a predetermined price on or before a set date. A CFD is an arrangement between two parties that agrees to exchange the difference in the price of an underlying asset at any time until the contract expires.
In the UK, listed options are more heavily regulated than CFDs. It is because you can use CFDs to speculate on the price of an underlying security, commodity, or currency, which can lead to significant losses if the market moves against you. Listed options are only available to buy and cannot be sold short, so you cannot use them for speculative purposes.
What are the differences between the two?
Availability
Listed options are only available on regulated exchanges, whereas you can trade CFDs on various platforms, including unregulated exchanges.
Price discovery
The price of a listed option is discovered through open and transparent bidding on an exchange. The price of a CFD is determined by the two parties involved in the contract.
Settlement
When you buy or sell a listed option, the settlement occurs immediately upon expiration. With a CFD, you can choose to settle the contract at any time before expiration.
Expiration
Listed options have fixed expiration dates, whereas CFDs do not have an expiration date.
Tracking
The performance of a listed option is closely correlated to the underlying security, commodity, or currency. CFDs are more speculative and can track the performance of an underlying asset or index or even be based on nothing more than the market’s direction.
Taxation
Listed options are generally subject to capital gains tax, whereas CFDs are not subject to capital gains tax.
Benefits of trading with listed options
Transparency
The price of a listed option is discovered through open and transparent bidding on an exchange. You always know what you’re paying for your options, and there is no hidden fee.
Liquidity
Listed options are highly liquid products, which means you can buy and sell them quickly and easily. It makes it easy to get in and out of trades quickly and at low costs.
Risk management
Listed options offer a great way to manage risk. Because they can only be bought, they cannot be sold short, so you can’t lose more than you’ve invested.
Diversification
Listed options offer a great way to diversify your portfolio. By investing in a range of different options, you can reduce the risk of your portfolio.
Simplicity
Listed options are simple products to trade. So, they are ideal for novice traders or those who want a simple way to trade the markets.
Limited losses
As mentioned earlier, because listed options can only be bought and cannot be sold short, you can’t lose more than you’ve invested. It makes them an excellent tool for risk management.
Benefits of trading CFDs
Availability
CFDs are available on a variety of platforms, including unregulated exchanges. They are more widely available than listed options.
Price discovery
The price of a CFD is determined by the two parties involved in the contract. So, you can find a deal that accommodates your needs.
Leverage
CFDs can be leveraged up to 50:1, giving you greater control over your trading positions.
Tracking
The performance of a CFD depends on the performance of an underlying asset or index or the market direction. It gives you greater flexibility when choosing which CFDs to trade.
Taxation
CFDs are not subject to capital gains tax, making them a more tax-efficient way to trade the markets.
Diversification
By trading CFDs, you can gain exposure to various markets, including commodities, currencies, and indices. It helps to diversify your portfolio and reduce risk.
In conclusion
In the end, you will need to decide for yourself which one is best for you to trade with. Listed options have several advantages over CFDs, including risk management features, liquidity, transparency, and predictability. CFDs, on the other hand, offer greater flexibility and availability. It would be best to carefully consider your trading objectives and strategies before deciding which one is right for you. You can see more of the Saxo markets here.
