Full Time Spread Betting
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Full Time Spread Betting
Shobhit Seth is a freelance writer and an expert on commodities, stocks, alternative investments, cryptocurrency, as well as market and company news. In addition to being a derivatives trader and consultant, Shobhit has over 17 years of experience as a product manager and is the owner of FuturesOptionsETC.com. He received his master's degree in financial management from the Netherlands and his Bachelor of Technology degree from India.
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Spread betting lets people speculate on the direction of a financial market or other activity without actually owning the underlying security; they simply bet on its price movement. There are several strategies used in spread betting, from trend following to news-based wagers. Other traders look to capitalize on rare arbitrage opportunities by taking multiple positions in mispriced markets and putting them back in line.
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Spread betting refers to speculating on the direction of a financial market without actually owning the underlying security.
An outright option is an option that is bought or sold individually and is not part of a multi-leg options trade.
Options are financial derivatives that give the buyer the right to buy or sell the underlying asset at a stated price within a specified period.
A derivative is a securitized contract whose value is dependent upon one or more underlying assets. Its price is determined by fluctuations in that asset.
An iron condor involves buying and selling calls and puts with different strike prices when a trader expects low volatility.
A short call is a strategy involving a call option, giving a trader the right, but not the obligation, to sell a security.
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Among the many opportunities to trade, hedge or speculate in the financial markets, spread betting appeals to those who have substantial expertise in identifying price moves and who are adept in profiting from speculation . One thing should be made clear: spread betting is currently illegal in the United States. 1 That said, it's still a legal and popular practice in some European countries, particularly in the United Kingdom. For this reason, all examples quoted in the following strategies are cited in British pounds, or GBP (£) .
Spread betting comes with high risks but also offers high-profit potential. Other features include zero taxes, 2 high leverage , and wide-ranging bid-ask spreads . If spread betting is legal in your market, here are few strategies you could follow.
Popular betting firms like U.K.-based CityIndex allow spread betting across thousands of different global markets. Users can spread bet on assets like stocks, indices, forex, commodities, metals, bonds, options, interest rates, and market sectors. 3 To do so, bettors often apply trend following , trend reversal , breakout trading, and momentum trading strategies for various instruments, and across various asset classes such as commodities, FX, and stock index markets.
Corporate moves can trigger a round of spread betting. For example, take when a stock declares a dividend and the dividend subsequently goes ex (meaning to expire on the declared ex-date ). Successful bettors keep a close watch on particular companies' annual general meetings ( AGM ) to try and get the jump on any potential dividend announcements, or other critical corporate news.
Say a company whose stock is currently trading at £60 declares a dividend of £1. The share price starts to rise up to the level of the dividend: in this case, somewhere around £61. Before the announcement, spread bettors take positions intended to gain from such sudden jumps. For example, say a trader enters a long-bet position of 1,000 shares at £60, with a £5 per point move. So in our example, with the £1 price increase upon the dividend announcement, the trader gains:
Similarly, bettors will seek to take advantage of the dividend's ex-date. Assume that one day before the ex-date, the stock price stands at £63. A trader may take a short position of 1,000 shares with a £10 spread bet per point. The next day, when the dividend goes ex, the share price typically falls by the (now-expired) dividend amount of £1, landing around £62.
The trader will close his position by pocketing the difference: in this case, a £10,000 profit:
Experienced bettors additionally mix spread betting with some stock trading. So, for instance, they may additionally take a long position in the stock and collect the cash dividend by holding it beyond the ex-date. This will allow them to hedge between their two positions, as well as gain a bit of income through the actual dividend.
Structuring trades to balance profit-and-loss levels is an effective strategy for spread betting, even if the odds aren't often in your favor.
Say that on average, a hypothetical trader named Mike wins four spread bets out of five, with an 80% win rate. Meanwhile, a second hypothetical trader, Paul, wins two spread bets out of five, for a 40% win rate. Who's the more successful trader? The answer seems to be Mike, but that might not be the case. Structuring your bets with favorable profit levels can be a game-changer.
In this example, say that Mike has taken the position of receiving £5 per winning bet and losing £25 per losing bet. Here, even with an 80% win rate, Mike's profits are wiped out by the £25 he had to pay on his one bad bet:
By contrast, say Paul earns £25 per winning bet and only drops £5 per losing bet. Even with his 40% win rate, Paul still makes a £7 profit (0.4 x £25 –0.6 x £5). He winds up the winning trader despite losing 60% of the time.
Spread betting often concerns the price moves of an underlying asset, such as a market index. If you bet £100 per point move, an index that moves 10 points can generate a quick profit of £1,000, though a shift in the opposite direction means a loss of a similar magnitude. Active spread bettors (like news traders ) often choose assets that are highly sensitive to news items and place bets according to a structured trading plan. For example, news about a nation's central bank making an interest-rate change will quickly reverberate through bonds, stock indices, and other assets.
Another ideal example is a listed company awaiting the results of a major project bidding. Whether the company wins or loses the bid means a stock price swing in either direction, with spread bettors taking positions based on both outcomes.
Arbitrage opportunities are rare in spread betting, but traders can find a few in some illiquid instruments. For example, say a lowly tracked index is currently at value 205. One spread-betting firm is offering a bid-ask spread of 200-210 for the closing price, while another offers a 190-195 spread. So a trader can go short with the first firm at 200 and long with the other at 195, each with £20 per point.
In each case, she still gets a profit of £250, as she nets five points, at £20 per point. However, such arbitrage opportunities are rare and depend on spread bettors detecting a pricing anomaly in multiple spread betting firms and then acting in a timely manner before the spreads align.
The high profit potential of spread betting is matched by its serious risks: the move of just a few points means a significant profit or loss. Traders should only attempt spread betting after they've gained sufficient market experience, know the right assets to choose, and have perfected their timing.
City Index by Gain Capital. " What Is Spread Betting? "
Spread Betting: What It Is & How It Works
Updated: May 20, 2022 Written By: Stephen Simpson Reviewed By: Jason Kirsch, CFP
Stephen Simpson is a freelance financial writer and investor. Spent close to 15 years on the Street (sell-side, buy-side, equities, bonds); now a semi-retired raccoon rancher. That last part isn't entirely true. Probably.
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The use of leverage is one way for an investor to enhance their returns, with the accompanying risk of magnifying the losses. There are several means to employ leverage. One option for some investors is to engage in what is called spread betting. While spread betting strains the definition of investing, it is nevertheless a way to make money from stocks, indices, and other types of securities through the use of considerable leverage.
Simply defining spread betting can be controversial; it can be defined as a derivative investment strategy, but it can also be defined as gambling. Further blurring the distinction, most spread betting companies refer to themselves as “brokers”, and many of these “brokers” openly refer to a spread betting transaction as a “bet”.
Spread betting is essentially speculating on the future direction of a specified financial instrument like an individual stock or index by making a directional bet with the spread betting company. The bettor chooses the security in question (like an individual stock or stock index), decides on the size of the bet, puts up a small percentage of the notional trade value as collateral (margin), and then profits or loses money depending upon how the price of the underlying security moves.
With financial spread betting, participants never own (and never can own) the underlying financial instrument. When an investor buys shares in a company, they become literal part-owners of that company, and when an investor buys a commodity futures contract there can be at least a technical possibility of taking physical delivery of the commodity, though most futures are settled in cash.
Spread betting is illegal in the United States as of this writing. Most spread betting companies in the U.K. will not open spread betting accounts from U.S. residents but may offer Contract for Difference (or CFD trading).
Tip: Spread betting used to be legal in the United States and was conducted at places called "bucket shops". Bucket shops were blamed for contributing to two market crashes in the early 1900s, with the practice eventually banned in the early 1920s. Investors can read more about bucket shops in Edwin Lefevre's book 'Reminiscences of a Stock Operator'.
Just as with betting on a horse race or sporting event, spread bettors win or lose money based upon the outcome of the bet, though spread betting is not an all-or-nothing proposition like sports betting. It’s also important to note that the word “spread” means something different with financial spread betting than the term “spread” as it applies to sports betting.
Likewise, spread betting and spread trading may sound similar, but they are very different. Spread trading involves simultaneously buying and selling related financial instruments to profit from a change in the underlying difference in value (the spread) between the instruments.
For instance, traders can play the “crush spread”, the difference between the value of a soybeans futures contract and the value of soybean meal and soybean oil contracts. This difference is the profit margin for processing soybeans into soybean meal and soybean oil and it can shrink or expand for a variety of reasons. If a trader believes that that margin is likely to change, they can engage in spread trading by simultaneously buying and selling soybean, soybean meal, and/or soybean oil contracts to profit from that change.
The would-be bettor decides what security they wish to bet on from among those offered by a spread betting company.
The bettor then decides on the stake size—how much they want to bet on each point , or the minimum movement in the security price. A point will typically be equal to a penny per share for a stock and a point for a stock index futures contract but can vary for other instruments like commodities. In other words, a bettor can make a bet that will pay (or lose) £5 for every penny that a stock goes up or down or every one-point change in the value of an index futures contract.
The stake size determines the notional amount of the bet—a £1 stake for a stock trading at £15 means a notional trade value of £1,500 (£1 per penny).
However, a £3 stake for a stock trading at £30 would have a notional value of £9,000.
The notional amount of the bet determines the required minimum margin, which can range from under 5% to 20% depending upon the security and the spread betting company.
Once the minimum margin is in place, the bet is executed, with the bettor paying the worse of the offered spread (buying at the higher ask price or selling at the lower bid price). The bettor can end the bet at any time, doing so by reversing the transaction (selling at the bid price or buying at the ask price).
Spread bets have durations. Generally, bets either expire at the end of the day or at the end of a quarterly period (more typical with futures contracts).
To better understand how spread betting can work, consider the following example, which first includes an example of a regular stock transaction:
An individual wishes to day trade in the shares of XYZ Plc, and those shares currently trade at a bid/ask spread of £100.00/£100.10, with a brokerage charging a £5 commission to buy or sell.
The individual decides to buy 100 shares and the trade is entered in the morning at £100.10 with a £5 commission, for a total cost of £10,015.
During the day the price of XYZ Plc shares increases by £5/share and the trade is closed successfully at a bid price of £105, with another £5 commission. The individual now has £10,495, earning £480 (before considering taxes).
In this example, the individual needed to have the £10,015 from the start of the transaction, or employ margin.
Now consider that transaction as a spread bet.
First, that individual must decide on their bet size, also known as the “stake” – the amount of money they’re committing to each minimum price move of the underlying instrument. In this case, the investor chooses a stake of £1 per “point” (the point is the minimum price move for the instrument, in this case, £0.01 per share).
While XYZ Plc is trading at £100.00/£100.10 on the stock exchange, the spread offered by the spread betting company is £99.90/£100.20. In this case, then, the notional amount of the transaction is £1/point times the spread betting company’s ask price, or £10,020
The broker requires a 20% deposit, or £2,004 .
As in the prior example, the share price of XYZ Plc increases by £5/share and the investor decides to close the bet before the end of the day, selling at the betting company’s new bid price of £104.90. The profit from the bet is £470.
((£104.90 - £100.20) x £1 per £0.01) = £470
That is almost the same profit as in the earlier example ( £ 480), but there are no taxes later, and the return on initial investment is much larger—more than 23% (£470/£2,004) versus 4.8% (£480/£10,015).
Now consider an example where the value of XYZ Plc shares falls. In this case, the share price falls just £2 to £98.00/£98.10, with the bettor seeing a spread of £97.90/£98.20 from his spread betting company. The value of the bet has now declined by £230.
(£100.20 - £97.90) x £1 per £0.01 = £230
This leaves £1,774 from the original deposit, or a 11% loss .
If the investor had purchased the shares and seen a similar decline, the loss would have been £205 just over 2%, and that loss would be tax deductible.
(((£100.10 - £98) x 100) - £5) / £10,015 = 2%
In this example, the person bought and sold within a day. This is an important detail because of the impact of financing/holding costs. If the share price hadn’t moved at all (ending the day at a bid/ask of £100/£100.10) and the individual chose to carry over the trade to the next day, it would incur an extra cost of around £7 to £9 (at typical spread betting company rates as of this writing). That cost would be incurred every day the trade was open while acquiring the shares for cash would incur no day-to-day costs.
Since spread betting involves large amounts of leverage, risk control is a key concern and a key element to long-term success. Setting maximum allowable losses is a useful strategy for limiting risk and can be achieved through stop loss and guaranteed stop loss orders.
A stop loss order allows a spread bettor to limit risk by establishing a predetermined price at which the broker will close the transaction. Many brokers require stop orders on every trade, and that may include an automatic stop loss order entered when the initial transaction is executed.
Tip: Stop loss orders do not offer perfect protection. When the specified price is reached, the stop loss order becomes a market order and there can be slippage between the price of the stop loss and the actual price at which the transaction is closed out – this slippage can be larger in periods of elevated volatility and is also influenced by how quickly the spread betting broker executes transactions.
Most brokers now offer guaranteed stop loss order
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