A CFD option is an option which is based on a contract for difference (CFD) rather than an underlying asset. The CFD which underlies the option, in turn, is based on an underlying asset.
Because CFDs are over the counter contracts between investors and brokers, they allow investors to open investment positions which are smaller than the standard contract sizes used by exchanges. The same applies to CFD options. Investors can use CFD options to open smaller options contracts than they would be able to open using standard options traded on options exchanges.
Example: An investor wants to get an option which allows them to buy gold if the price falls to 35,000 francs per kilogram. They are only interested in investing in 500 grams of gold, but the standard contract size for gold options traded on exchanges is 1 kilogram. However, their broker offers CFD options based on 100-gram gold CFDs. The investor buys a CFD option for 5 gold CFDs. The CFDs, in turn, are based on underlying assets totaling 500 grams.
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