Game Spread Betting Meaning
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Game Spread Betting Meaning
Spread betting allows traders to bet on the direction of a financial market without actually owning the underlying security. Spread betting is sometimes promoted as a tax-free, commission-free activity that allows investors to speculate in both bull and bear markets, but this remains banned in the U.S. Like stock trades, spread bet risks can be mitigated using stop loss and take profit orders.
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Spread betting refers to speculating on the direction of a financial market without actually owning the underlying security.
Forex (FX) is the market where currencies are traded and is a portmanteau of "foreign" and "exchange." Forex also refers to the currencies traded there.
A bear put spread is a bearish options strategy used to profit from a moderate decline in the price of an asset. It involves the simultaneous purchase and sale of puts on the same asset at the same expiration date but at different strike prices, and it carries less risk than outright short-selling.
A cash-and-carry trade is an arbitrage strategy that exploits the mispricing between the underlying asset and its corresponding derivative.
Covered interest arbitrage is a strategy where an investor uses a forward contract to hedge against exchange rate risk. Returns are typically small but it can prove effective.
A bull spread is a bullish options strategy using either two puts or two calls with the same underlying asset and expiration.
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Spread betting is a derivative strategy, in which participants do not own the underlying asset they bet on, such as a stock or commodity. Rather, spread bettors simply speculate on whether the asset's price will rise or fall, using the prices offered to them by a broker.
As in stock market trading, two prices are quoted for spread bets—a price at which you can buy (bid price) and a price at which you can sell (ask price). The difference between the buy and sell price is referred to as the spread. The spread-betting broker profits from this spread, and this allows spread bets to be made without commissions, unlike most securities trades.
Investors align with the bid price if they believe the market will rise and go with the ask if they believe it will fall. Key characteristics of spread betting include the use of leverage, the ability to go both long and short, the wide variety of markets available, and tax benefits.
If spread betting sounds like something you might do in a sports bar, you're not far off. Charles K. McNeil, a mathematics teacher who became a securities analyst—and later a bookmaker—in Chicago during the 1940s has been widely credited with inventing the spread-betting concept. But its origins as an activity for professional financial-industry traders happened roughly 30 years later, on the other side of the Atlantic. A City of London investment banker, Stuart Wheeler, founded a firm named IG Index in 1974, offering spread betting on gold. At the time, the gold market was prohibitively difficult to participate in for many, and spread betting provided an easier way to speculate on it.
Despite its American roots, spread betting is illegal in the United States.
Let's use a practical example to illustrate the pros and cons of this derivative market and the mechanics of placing a bet. First, we'll take an example in the stock market, and then we'll look at an equivalent spread bet.
For our stock market trade, let's assume a purchase of 1,000 shares of Vodafone (LSE: VOD ) at £193.00. The price goes up to £195.00 and the position is closed, capturing a gross profit of £2,000 and having made £2 per share on 1,000 shares. Note here several important points. Without the use of margin, this transaction would have required a large capital outlay of £193k. Also, normally commissions would be charged to enter and exit the stock market trade. Finally, the profit may be subject to capital gains tax and stamp duty.
Now, let's look at a comparable spread bet. Making a spread bet on Vodafone, we'll assume with the bid-offer spread you can buy the bet at £193.00. In making this spread bet, the next step is to decide what amount to commit per "point," the variable that reflects the price move. The value of a point can vary.
In this case, we will assume that one point equals a one pence change, up or down, in the Vodaphone share price. We'll now assume a buy or "up bet" is taken on Vodaphone at a value of £10 per point. The share price of Vodaphone rises from £193.00 to £195.00, as in the stock market example. In this case, the bet captured 200 points, meaning a profit of 200 x £10, or £2,000.
While the gross profit of £2,000 is the same in the two examples, the spread bet differs in that there are usually no commissions incurred to open or close the bet and no stamp duty or capital gains tax due. In the U.K. and some other European countries, the profit from spread betting is free from tax.
However, while spread bettors do not pay commissions, they may suffer from the bid-offer spread, which may be substantially wider than the spread in other markets. Keep in mind also that the bettor has to overcome the spread just to break even on a trade. Generally, the more popular the security traded, the tighter the spread, lowering the entry cost .
In addition to the absence of commissions and taxes, the other major benefit of spread betting is that the required capital outlay is dramatically lower. In the stock market trade, a deposit of as much as £193,000 may have been required to enter the trade. In spread betting, the required deposit amount varies, but for the purpose of this example, we will assume a required 5% deposit. This would have meant that a much smaller £9,650 deposit was required to take on the same amount of market exposure as in the stock market trade.
The use of leverage works both ways, of course, and herein lies the danger of spread betting. As the market moves in your favor, higher returns will be realized; on the other hand, as the market moves against you, you will incur greater losses. While you can quickly make a large amount of money on a relatively small deposit, you can lose it just as fast.
If the price of Vodaphone fell in the above example, the bettor may eventually have been asked to increase the deposit or even have had the position closed out automatically. In such a situation, stock market traders have the advantage of being able to wait out a down move in the market, if they still believe the price is eventually heading higher.
Despite the risk that comes with the use of high leverage, spread betting offers effective tools to limit losses .
Risk can also be mitigated by the use of arbitrage, betting two ways simultaneously.
Arbitrage opportunities arise when the prices of identical financial instruments vary in different markets or among different companies. As a result, the financial instrument can be bought low and sold high simultaneously. An arbitrage transaction takes advantage of these market inefficiencies to gain risk-free returns.
Due to widespread access to information and increased communication, opportunities for arbitrage in spread betting and other financial instruments have been limited. However, spread betting arbitrage can still occur when two companies take separate stances on the market while setting their own spreads.
At the expense of the market maker, an arbitrageur bets on spreads from two different companies. When the top end of a spread offered by one company is below the bottom end of another’s spread, the arbitrageur profits from the gap between the two. Simply put, the trader buys low from one company and sells high in another. Whether the market increases or decreases does not dictate the amount of return.
Many different types of arbitrage exist, allowing for the exploitation of differences in interest rates, currencies, bonds, and stocks, among other securities. While arbitrage is typically associated with risk-less profit, there are in fact risks associated with the practice, including execution , counterparty, and liquidity risks. Failure to complete transactions smoothly can lead to significant losses for the arbitrageur. Likewise, counterparty and liquidity risks can come from the markets or a company’s failure to fulfill a transaction.
Continually developing in sophistication with the advent of electronic markets, spread betting has successfully lowered the barriers to entry and created a vast and varied alternative marketplace.
Arbitrage, in particular, lets investors exploit the difference in prices between two markets, specifically when two companies offer different spreads on identical assets.
The temptation and perils of being overleveraged continue to be a major pitfall in spread betting. However, the low capital outlay necessary, risk management tools available, and tax benefits make spread betting a compelling opportunity for speculators.
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What Is A Point Spread?
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Point spread betting is the most popular form of sports betting. The vast majority of sports wagers use a point spread thanks to the popularity of football and basketball. Even though this type of betting is so popular, it may take awhile to understand.
The point spread is sometimes known as an equalizer for sportsbook operators. All teams aren’t created equally, so sportsbooks can create a point spread for a game so that each team playing has an almost even chance of winning the game. In a way, the point spread will even the field for both teams .
The point spread gives a reason for bettors to risk money on both teams. The better team playing in the game is considered favorite. They have to win by the point spread offered by the sportsbook. The favorite in a game is listed as being minus (-) the point spread.
The worse of the teams playing in the game is called the underdog . The bettor wins if this team wins the game outright or loses by an amount smaller than the point spread. The underdog in a game is listed as being plus (+) the point spread.
Let’s use the upcoming Super Bowl between the Kansas City Chiefs and Tampa Bay Buccaneers as an example.
Using this example, the Chiefs opened as 3-point favorites over the Buccaneers (currently Chiefs -3 ). The Chiefs need to win by 4 or more points to cover the spread.
Likewise, the Buccaneers opened as 3-point underdogs. That means the Buccaneers would need to win the game outright or not lose the contest by 4 points or more. If the line is Chiefs -3 and they win by exactly 3 points, the betting result is a “push” and bettors for both sides would get their wagers refunded.
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Point spreads are usually set with -110 odds , but pricing often fluctuates at online sportsbooks . This is the sportsbook operators’ house edge . The odds guarantee the sportsbook operator will see a little money over time. When the odds are set at -110, the bettor must wager $110 to win $100 (or $11 to win $10).
The odds on a point spread are most commonly known as the vigorish or “vig” for the sportsbook. You might hear this small profit margin for the sportsbook called the “juice” by some sports bettors.
A “pick em” (sometimes seen as “pick”) is when the teams have a point spread of zero, meaning neither team is favored. In this instance, you’re essentially picking moneyline and your bet will be determined on the winner alone.
A spread of minus-seven (-7) means that a is favored to win the game by a touchdown (technically, a touchdown and the extra point). A team favored by -7 must win the game by eight or more points to win the bet. If the team wins by seven, the result is a “push” and the bet is refunded.
A spread of +7 means the team must win the game or lose by fewer than seven points to win the bet. A loss by seven would result in a push.
A -3 spread means that the favorite must win by more than a field goal to win the wager. A three-point win would result in a push and the sportsbook would refund the wager.
A spread of +3 means the team listed as the underdog must win the game or lose by fewer than three points to cash the bet. A three-point loss would be graded as a push by the sportsbook and the bet would be refunded.
In 2019, the Baltimore Ravens led the NFL in point differential per game at +13.7 points; the Miami Dolphins ranked last in the NFL in point differential per game at -11.7. Even Kansas City– known for their explosive offense– had an average point differential in 2019 of just 9.7 points. The net point differential in the NFL is -14.1, or -0.9 points per game. Basically, the talent differential in the NFL is so minute that even mismatched teams often draw games within a score of each other.
NFL spreads are most commonly between one point and four, with six being a heavy favorite and extremes coming out around 15-20 point favors. (For those wondering, the 1941 Chicago Bears hold the NFL record of point differential at +15.7 points per game. Conversely, Ohio State had a +33.1 average point differential in 2019.)
Sportsbook operators often aim to have equal money on both sides of a point spread. When the money is exactly split the sportsbook operator will see the exact vigorish as their profit margin. If all things are equal over time this will maximize how much money the sportsbook operator can make.
In an effort to have equal money on both sides of a wager, the sportsbook operator will move the point spread to attract money on the side that customers aren’t betting on. The odds for a point spread might change before the actual point spread. There are certain point spread numbers, like 3 and 7 in football, the sportsbook operators would like to avoid moving away from since the final score margin falls on these two numbers most often.
For example, if a lot more money is wagered on the New England Patriots -3, the vig may shift from -112 to -115 and -120 before the line moves to -3.5.
Football and basketball games are mostly bet using a point spread. The less popular major sports, baseball and hockey, are mostly bet using a moneyline . In an effort to make baseball and hockey more appealing to point spread bettors, the sportsbook operators offer run and puck lines, respectively.
These alternative lines give point spread bettors a chance to wager on other sports using a more familiar method of betting. Since points (runs and goals) aren’t as easy to come by in baseball and hockey, the odds with the lines may have a wider spread than a football or basketball game.
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