CFD vs Binary Options Trading: Similarities & Differences

Binary options vs. CFD (Contract for Difference) trading are two very popular derivative instruments. When considering the differences between binary options and CFD trading, it’s important to understand that both allow traders to speculate or bet on the future price of an asset.

Binary Trading

As the name suggests, binary options are either ‘yes’ or ‘no’ situations, with each trade resulting in a predetermined profit or loss.

Essentially, binary options are a prediction that the price of an asset will be higher or lower than a predetermined position, often the initial price known as the strike price. If correct (referred to as ‘in the money’), a trader receives the predetermined amount – sometimes a percentage of the initial position. And if incorrect (referred to as ‘out of the money’), the trader suffers a complete loss of the initial position.

Example of Binary Trading

For example, if an investor thinks that the share price of Delivery at the time of a specific closing date will increase above $50, they can buy a ‘yes’ binary option for $100 with a 77% payout. If the trader is correct and the share price is $54 at the closing date, the trader will receive $177 ($77 profit). This figure will remain the same, regardless of how much the delivery share price is above the strike price. However, if the share price falls to $49, the trader will lose the entire $100 trade option.

Binary options typically produce riskier, more rewarding outcomes compared to CFDs, providing the potential for larger profits in markets you are confident about. While CFDs offer lower earnings (in comparison to the amount invested), it prepares a more secure foundation for trading with stop-loss and other risk management strategies.

What is CFD?

CFD, or ‘Contract for Difference’, is a financial contract between a trader and a broker that facilitates the exchange of the difference between the initial and closing position of an asset at a specified time. Essentially, it allows traders to speculate on changes in the value of an asset, resulting in profit or loss based on the movement of the asset’s value. Specifically, CFDs are dependent on both the direction and price movement. Traders never actually own the underlying asset – for example, an ETF, currency pair, or commodity. This provides additional market risk, as if you want to buy oil CFDs, you don’t need to take delivery of a thousand barrels of oil. Additionally, CFDs allow traders to ‘go long’, taking a position that anticipates price increase, or ‘go short’, taking a position that sells in anticipation of a price decrease.

Binary options vs CFD trading

When considering binary options vs CFD trading, there are several similarities and differences. The success or failure of both types of trades depends on predicting whether the asset’s value will increase or decrease.

Both instruments are derivatives, meaning investors do not take ownership of the underlying asset, they are simply speculating on the direction of price movement. This makes them relatively inexpensive and eliminates entry barriers such as the need for large capital for expensive share prices.

Differences between Binary Options and CFD Trading

The main difference between the two instruments is that CFDs depend on how far the value of the underlying asset increases. On the other hand, binary options generate a predetermined profit or loss based on the direction of price movement.

Also check: CFD vs Forex Trading

Which is more risky: Binary Option or CFD?

Binary options typically produce riskier, more rewarding outcomes compared to CFDs, providing the potential for larger profits in markets you are confident about. While CFDs offer lower earnings (in comparison to the amount invested), it prepares a more secure foundation for trading with stop-loss and other risk management strategies. Binary options also offer the opportunity to earn profits by correctly predicting that the asset’s value will neither increase nor decrease with in/out options. There is no equivalent to CFDs.

Finally, the cost structures of binary options vs CFDs are very different. The former works like a bet, with the entire investment lost if the option is out of the money. On the other hand, CFDs include a commission or spread-based pricing structure that eats up a small percentage of the trade size.


Nikesh-Mehta-AllOnMoney

Hi, I am Nikesh Mehta, owner and writer of this site. I’m an analytics professional and also love writing on finance and related industry. I’ve done online course in Financial Markets and Investment Strategy from Indian School of Business. I can be reached at [email protected].


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