CFD’s Level 2

Agenda

• The market• Why trade CFD’s• How to trade CFD’s• Alternative derivatives trading• When to trade CFD’s• Good trading habits

The market

• The exchanges– Many large, non US

companies are also traded on the US or other exchanges

– Saxo Trader covers 24 exchanges

Why trade CFD’s• Leverage

Speculation V’s capital requirement

• Enables greater market exposure than your capital would allow.• Example: You buy 100 Ericsson CFDs @ SEK 25.40 for a nominal

position of SEK 2,540 requiring a margin of SEK 254. A few days later, you sell your position @ SEK 26.

Total profit: (26-25.40) * 100 = SEK 60Total RoC: 60/254 = 23.6%RoC if done with stocks: 60/2540 = 2.36%

• Note: The use of leverage exposes you to greater losses as well as profits. Always manage your margins

Why trade CFD’sCont….

• Can short sell as well as buy– Hedging– Trade a declining market

• Possibly reduced tax liabilities

How to trade CFD’s

• You trade CFD’s in the same way as you trade a stock, however you are able to short sell CFD’s.

• You are able to use the following orders for entry and exit in the market– Limit– Market– Stop– Trailing stop

Buying and selling and the associated interest

• Essentially, a CFD is a LOAN. It’s based on the notional value of the trade so when you buy, you borrow money and therefore pay interest at the local rate, whereas when you sell you are lending the money, therefore you are receiving the local interest.

Example of rates below:

Alternative Derivatives TradingCFD’s versus Options

• Most option or warrant traders are trading the stock derivative due to gearing possibilities.

• Very few investors realise that trading the equity markets through option derivatives is not the most efficient way to do it.

• Why?

• An option/warrant is priced from 5 different variables, namely interest rate, option strike price, current price of underlying, time to expiry and finally the volatility in the market.

• Therefore, an option trader interested in the direction of the price of the underlying can have a very unpleasant surprise if the other parameters goes against him and his option position, which is where CFD’s really show their strength.

• Specifically, option prices are affected by the following parameters in the following manner (parameter increasing while other remains constant):

Alternative Derivatives Trading• Therefore, unless you are a volatility trader, a trader speculating on which direction

volatility will go, a CFD offers the following benefits compared to an option/warrant:

- No impact from volatility, time, or strike price measures on your CFD position.- No expiration date.- No premium, just commission of 0.1%- More transparent P/L, easier to follow whether you are making money or not.

• The pro’s and con’s:

- If you are a volatility trader, CFDs are not for you.- Not the same gearing effect, even though premium on options are a “sunk” cost.

• Unless you are an option trader willing to speculate in volatility measure, which is the one with the most impact on option prices, together with underlying stock price and time to expiration, options are not a good way to speculate on stock prices.

When to trade CFD’s

• Market volatility due to political changes• Data/Announcements• Technical signal• M&A and Takeovers

Market volatility due to political changes

• Here we can see a 16.4% rise in the FTSE after the allied forces invade Iraq in 2003.

Data/Announcements• Here we can see a 4% move

in the Dow Jones as a result of the Fed reducing interest rates by .5%

Technical signal

• Here we can see that for a long period BP was underperforming the FTSE. This could be considered a buy signal, and it would have been a profitable trade

• Here we can see that by using short-term moving averages we can find some simple buy and sell signals.

M&A and Takeovers

• Here we see the move in price due to the acquisition of Youtube by Google

Good trading habits

• Discipline!• Set long-term goals• Don’t overextend your finances and manage your

margins• Diversify, portfolio management• Trade with your head, not with your heart• Trade your plan: If you fail to plan, you plan to fail. Stick

to your strategy. Plan the trade, trade the plan.• Manage your positions and orders diligently

Thank you