Spread Betting Stock Selection

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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.
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.
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.
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.
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
City Index by Gain Capital. "What Is Spread Betting?" Accessed Oct. 9, 2020.
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Advanced Trading Strategies & Instruments
Options Trading Strategy & Education
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.
Conversion arbitrage is an options trading strategy employed to exploit the inefficiencies that exist in the pricing of options.
A ratio spread is a neutral options strategy in which an investor simultaneously holds an unequal number of long and short positions in a specific ratio.
A cash-and-carry trade is an arbitrage strategy that exploits the mispricing between the underlying asset and its corresponding derivative.
An options roll down is a change from one option position to another with a lower strike price.
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Why spread bet rather than buy shares? Tax-free, profiting from falling markets and leverage are the reasons spread betting is an ever more popular tool. The combined effect of commissions, stamp duty and market spreads usually means that for the short-term investor it's simply cheaper to open a spread bet than to actually buy and sell shares through a brokerage house.
In the past, the spread firms made a name for themselves during high profile flotations, creating a so-called 'grey market' and betting on where a company's share price would close at the end of the first day's trading. This was risky business but served as an attention-grabber, particularly when some of the big state enterprises were being privatised - given those circumstances it was natural for spread betting companies to start offering bets on equities to meet the popular demand.
IG Index was the first to start offering bets on a select number of FTSE-100 stocks. The range of opportunities available today are vast and varied - nowadays it's possible to bet UP or DOWN on any FTSE 100 or FTSE 250 shares as well as a limited range of AIM listed stocks. You can also bet on US shares including all DOW 30 shares, all of the S&P 500 Index and Nasdaq 100 shares as well as many of the largest European, Asian and Australian securities. For instance, companies such as Pfizer, Google, Puma, BMW and Toyota are quoted by most spread betting proviiders even though they trade on markets outside the UK.
One difference between spread betting on UK and non-UK shares is the way that the price is quoted. For every penny a UK share price moves, you make or lose your chosen bet size, given in Pounds Sterling (£), or Euros (€) if you live in Ireland. The price on US shares and some European shares are quoted in US dollars (US $) or Euros (€) but for each cent movement you make or lose the £ amount you chose to bet. European countries not using the Euro will have stocks quoted in their relevant currency, for instance, Swiss shares are quoted in Swiss francs (CHF).
Betting on individual shares is no different to spread betting the indices - the gearing is the same. The other advantage on betting on equities as opposed to index sectors, indices or commodities is that there is more information available in that you can actually check the company's profit & loss accounts and maybe even try their products for yourself or give the directors a ring (and/or visit the company premises!). Also, as opposed to index futures which are heavily traded on greed and psychology and therefore are very volatile and fluctuate a great deal, shares are, in my opinion easier to trade (less prone to getting stopped out) especially if you rely on technical analysis.
Spread betting offers several advantages when compared to buying the shares from a stockbroker - there is no stamp duty and no dealing commission apart from the bid-offer spread. Also, profits are not subject to capital gains tax and traders can easily bet down on a share price as well as bet up. So even though the spread on a particular share (bid-offer spread) is always likely to be wider than the gap between the bid and offer price for that share on the stock market, spread betting on stocks can be more effective than buying the underlying stock (since there are no dealing commissions or stamp duty and trades are usually highly leveraged).
The stock market provides a more favourable environment for small investors than trading forex where you are basically trading against every major financial institution. Institutions still have some advantages such as easier access to management but the scales are less imbalanced than in any other area.
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