The term spread betting actually covers several types of bet. You will choose from what is available, and from your own choices in the way you bet. Most of this trading guide will talk just about a couple of the most common types, although what you learn can be applied to any type and to general financial market trading, including if you want, to direct stock trading. The financial advantages of spread betting which were covered in a previous section make it a good choice for an active trader.
The types of bets can be broken down into two groups – those that are immediate or intra-day, and those that are based on future pricing, or “futures” based.
The daily bet is perhaps the most obvious one to start looking at. It is an immediate type of bet, and simple to understand. It is based on the current market price, whether of a stock, an index, or a currency, and it expires at the end of the day, strictly when the market closes. If you try to place one of these bets outside market hours, you may not get a good quote on the spread, as there is no way for your spread betting provider to cover himself against overnight price movements, but you can usually find a spread betting provider who will let you place a bet for the next day from the time of the market closing.
If you let the bet expire, then you get whatever the price is, and it’s not necessarily what you see at 4:30pm, the official time of closing. There are a few minutes after closing time when the market is adjusted, also known as the “auction”, basically catching up with all the last minute orders and settling the daily limit orders, and this can affect the price either way. Other than that, you can close your bet any time before the market close, and you will get whatever your bookmaker is quoting at the time – more-or-less, as the prices are continuously updated, so if you are prone to hesitation it can move a little.
If you are in a winning position, and want to carry on with the bet past the market close, then you want to consider “rolling over the bet”. This means that the bet continues, at a slight cost, on the next day. The reason that you have to it roll over is that to comply with regulations, so that a spread bet can be considered a bet and therefore not subject to taxes and capital gains, the bet must be of a fixed duration. It is not your spread betting provider being awkward or trying to make more money out of you.
Actually, you strictly don’t roll over the same bet. Your spread betting company has to close one bet and start a new one for the same financial security. This also means that there should be a settlement of any profits or losses made by the first bet at the time of the roll over. It’s generally cheaper to roll over than to separately close one bet and open another, as you will pay lower spread charges.
Finally, if you are considering telling your broker to roll over your daily bet, be sure to let him know in good time, perhaps half-an-hour before the market close, so that he can keep his accounts straight.
Rolling Daily Bet
All this discussion leads us to the next type of bet, the “rolling daily”, which is a very common type of bet to place. This is so much easier, it is now considered the preferred option by many regular spread betters. It simply means that the daily bet is automatically rolled over by the broker every night, and you don’t need to instruct anyone. This type of spread bet has been available for many years now.
There are various small charges that you may incur with the rolling daily bet, and these are all figured out for you by the spread betting provider. If you take out a bet that the underlying financial security will increase in value, a long or buy bet, you will have daily interest charges. These are not huge, as they are based on a standard overnight interest rate, typically the LIBOR, plus a couple of points or percentages as determined by your broker. As they are worked out daily, they shouldn’t give you too much of a shock. If you happen to hold a bet through the share dividend time, then the price will be adjusted to allow for this too. If you are just playing the normal market fluctuations with your spread betting, you might want to skip holding a bet open at dividend time, as there can be swings either way, so unless you are paying attention you may be caught out.
If you are holding a bet on the short side, looking to profit from a fall in value, you actually qualify to receive interest each night – after all, you are taking the other side of the equation. It’s not enough to be excited about, as it is again calculated from a standard overnight rate, this time less a couple of points. That’s the theory, but given the pathetic interest rates that have been going around you will be lucky to see any effect of this. And again, there are adjustments for the dividend, if you are betting at that time.
Futures Style Bet
This style of bet is where it all began, the start of spread betting. Just like regular “futures” trading, it is based on particular settlement or expiration dates in the future, in this case every quarter, in March, June, September, and December. The pricing of the futures spread bet is loosely based on the underlying futures price. Note that this is not usually the same as the current or spot price, because at the least a futures contract must include a “cost of carry”. Without going into too much detail, this is like an interest charge for borrowing the present day cost of the commodity, buying and storing it until the delivery date. In practice this actual action would only work for something like gold which wouldn’t deteriorate, and not for agricultural futures, but it represents a no-risk way of fulfilling the futures contract on the due date, so is a benchmark from which the price can be refined.
You can usually get a spread bet for the next two quarters, so in January you would be able to bet on the March and the June figures. You do not need to wait until then, of course, you can close your bet as soon as you wish, even after just a couple of minutes if the price is right. There will be differences in the price, so it is up to you to pick what you think will work best.
Another factor which will be worked into the futures price if it is on a stock is any dividends that are expected before the due date. Although futures can sound complicated, they are just the application of the various elements. The price of a future will inevitably tend towards the spot price or current market price over time, as when the futures contract expires that’s exactly what you have, a contract to buy and sell the goods here and now.
One point which you may want to bear in mind, if you are not sure whether to use rolling daily bets or are tempted towards futures based bets because they seem easier. It will depend on your spread betting provider, but you may well find that the futures bets have a much larger spread than the daily. The size of spread can make a big difference to your profitability over time, as it adds up on every bet you take, so take care to figure that into your analysis.
The Impact of Bet Size Factors
When you set up your account, the spread betting company will provide you with a list of the bet size factors, or notional trading requirements, that will apply to your bets. This is very important, as it controls how much you can bet, and when you may be asked to deposit more money. This is used to calculate the margin or borrowing requirements. It all stems from the spread betting company wanting to make sure that you have enough money in your account to cover any losses that could potentially occur. He doesn’t want to be left having to sue you to get his money back, but you have to realize that spread betting, particularly if you are reckless, can certainly leave you owing more than the money you have already deposited with him.
The reason that this is important to mention now is that the bet size factors tend to be larger when you are betting on futures, so you will be able to bet less before you get a margin call. Typically you might see a factor of 250 for FTSE100 future style bets, and 100 for FTSE100 daily. As you will see later, this may not be an issue. Just because a broker allows you to bet, it does not mean that you should, and most beginners tend to bet too much anyway. There are other important factors about how much you should bet, and how much you are risking, bearing in mind that what you are betting is not what you may end up paying, if you have a loss or two.
The way the factor is applied is best explained with an example. Say you want to bet on the FTSE100 future at a price of £10 per point. The notional trading requirement means that you need £10 x 250 in your account to cover the bet, so you must have £2500. This is just to take out the bet, and does not include any cover should the bet start by losing. It also does not allow you to make any other bets, as each bet must be independently covered by funds.
Suppose you deposited £2500 with your spread betting provider, and wanted to bet on the FTSE100. You called or went online to your spread betting provider’s website and he quoted you a price of 5130 bid, and 5132 offered. You think that the index will go up, so you “buy”, “go long”, or take an “up bet” – these all mean the same thing – at a price of 5132 for £10 per point. The next day the price has dropped 50p to 5080 bid, 5082 offered. You are now £500 short in your account, as the loss is 50 x £10, your bet size, and you have no spare funds. This means that your broker will issue a margin call or cash call to you to make up this amount within a certain time-frame.
You put this extra money into your account, as demanded. The next day the price increases, just by 25p, Your broker will credit your account by £250 for this. You could get these funds refunded to you, or just leave them there as a cushion against the price falling again. In the next week the price steadily climbs by a total of another 125p, giving you a profit which you decide to take. The quoted price is 5230 bid, 5232 offered, so you close your bet at 5230, and your profit on the original bet is £980 (£10 staked times 5230 – 5132). As you left the extra money that you deposited in your account, you actually have more there than the initial stake plus profit, but that’s basically what you made.
Note that as soon as the bet started showing a profit after its first dip and margin call, you didn’t get any more issues with your spread betting company. No matter how high the index goes, there is no reason that your spread betting provider will ask you for more funds while you are in profit. But each day the bet will be looked at, and a call made if you don’t have the necessary deposit to cover the notional trading requirement of your open bets. As profits are included in your account each day, you actually have the spare funds to take out another bet, though you probably don’t want to get fully extended in case things start to go down and you have to find more money from your outside accounts.
You may sometimes see binary bets mentioned, so it’s worth knowing what they are. I generally don’t include them in a trading plan, as they take a limited and simplistic view of the markets, but you could make money with them if you were lucky.
When binary bets expire, you only have two possible outcomes (which is why they are called “binary”). You either win, or you don’t. If you win, you get a notional 100, if you lose you get nothing. The bet is usually easy to understand, such as “will the FTSE 100 finish the day higher than when it started?”, and your spread betting company will give you a price to bet either way. The price will change during the day, as one outcome or the other looks more likely, and as with all bookmaking, you can expect the bookmaker to try and balance his risk between the two sides. If it’s looking very likely that the index will finish up, then you will have to pay close to £100 to bet that way, giving you not much profit if you win, but not much risk.
More usually, you will see the cost of making an up or a down bet fairly even in a balanced market. Perhaps you would be quoted 55 – 50 on a slightly optimistic day, meaning that for 55 you can take a bet that you win if the FTSE finishes up, and for 50 you can take a bet that you win in the FTSE finishes down. In either case, if you guess wrong you get nothing, and lose all your stake. If you take a winning up bet, it costs you £55 say (it’s your choice how much to wager) to win £100 for a net profit of £45. The total of the prices quoted (55 and 50) is slightly more than 100 as that’s where the bookmaker will get his profit.
You will usually be able to close out your bet during the day at the current prices for a profit or a loss. One final point about binary betting is that the Financial Services Authority (FSA) which regulates the many of the markets and spread betting does not regulate binary betting. This should not make much difference to you when you use a reputable betting company.