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Spread betting explained – futures

So, we’ve looked in detail at two of the markets available to us in financial spread betting namely daily markets, and rolling daily markets. Now let’s look at the third broad group which comes under the heading of futures markets.

Now as you would expect, and I’m sure it’s not a great surprise, but these contracts are based on the underlying futures market for each instrument class or asset, and the spread reflects this accordingly. Indeed spread betting these contracts is very similar to trading the futures market and this is one of the issues I will cover later, the advantages and disadvantages, and why you might use one rather the other. For those of you used to trading futures and options, the next part will probably be second nature, so apologies in advance, but I do like to cover all the basics so that everyone has a solid understanding.

The spread betting contract quoted will be based on the underlying futures contract for the particular market you are considering, and all the information will be contained in the spread betting companies market information sheets that we looked at earlier. Now, unlike the daily rolling markets, these contracts will have a physical expiry date which is part of the contract specification. Depending on which market you are trading, the expiry may be either monthly, or quarterly, and will have a precise time and date on which the contract expires. Typically the contract periods are quarterly, and generally March, June, September and December, but will of course be in line with the underlying futures contract. Some markets may be based on monthly contract periods, ( or even weekly) , but the same principle applies, in that the contract will specify an expiry day and time at which point your contract will close out automatically.  Futures contracts differ from the rolling daily in their dividend treatment, and with these contracts you do not have to worry about credits and debits, as these have already been priced into the futures contracts spread.

The market information sheet will tell us which contracts the company is quoting on for the particular, the last trading day for the contract, and which exchange will be used for  the settlement basis. So for example, if we were in February, we might look to spread bet the March FTSE future, or the June FTSE future, knowing that if we open a March FTSE future today, that this will expire on the third Friday in March. If we were interested in oil, then we could trade a monthly contract with the settlement as shown ( you need to read this a few times to make sense of it!!) In addition to the contract periods, settlement details and last trading day, the market information sheets will also tell us the spread quoted for the contract, and the unit risk per contract ( 1 point for the index futures, and 1 cent for oil)

Now assuming you have an open position, is it possible to avoid the expiry date and continue holding the position open? The answer is yes, and you do this by contacting your spread betting company and asking them to roll the contract forward to the next available contract period. So if we take the above example again, where we purchased a March FTSE100 contract which is now coming up for expiry, and had decided we wanted to continue holding this contract for a further period, then we would roll this over to the June FTSE100. The spread betting company will then close your position and re-open in the new contract period, but remember there will be a cost for rollover, so think very carefully beforehand. If you are rolling over simply because this is a trade that has gone wrong and you are holding on in the hope of a recovery, then think very carefully, as it may be better to close out your contract and cut your losses.

As I said earlier, rollover and daily rolling are very different terms in spread betting. A daily rolling contract will rollover automatically. To roll a futures contract you have to ask for this to be done by the company, and it is your responsibility to keep an eye on your positions and to know when expiry is due ( NOT your spread betting company’s responsibility). So make sure you rollover in plenty of time and don’t leave it until the last minute. Also remember that you can close out your position at any time – you don’t have to wait until expiry!

Over the last few pages we have looked at the three broad types of product available, and naturally this can be confusing to anyone new to financial spread betting. So the obvious question is ” which products do I used to trade, when do I use them, and why?” – not an unreasonable question. So as always I will try to answer this question as simply as possible:

  • Daily Markets – only use these for short term intraday daily trades. They can be rolled over but it will be expensive so my suggestion is to be disciplined and if your trade goes against you, let it expire at the close of the market, and start again in the morning.
  • Rolling Daily Markets – only use these for trades of a few days. Do not be tempted to use them for longer term trades as the costs will be prohibitive, particularly if you leave long positions open over weekends. As with a daily market trade, if the position is going against you, don’t just leave it and hope it will come good in the end – it won’t. You must instruct your spread betting company to close these orders, otherwise they will continue to run until you either receive a margin call, or they hit your stop loss! For stocks, shares, and indices, make sure you understand the risks of dividends.
  • Futures Markets – use these for your long term trades for weeks or months. Always buy the closest month contract being quoted, as this will have the narrowest spread, and if there are only a few days to expiry, then I would wait for the contract to close and wait for the new contract to become the closest month. Remember, you will have to instruct your spread betting company to roll the contract over, otherwise it will automatically expire on the final trading day. This is your responsibility, so don’t blame the spread betting company if you forget. Remember also this will come at a cost. Again, if you are rolling over, simply in the hope that your position will improve – close out and start again, it will be cheaper in the long run. Remember you do not have to worry about dividends with the futures markets as these have been priced into the spread already.Gosh, and that was just the basics!
  • Now we can start to look at how to open a position and how you make, or lose money, in financial spread bettiing.