Financial spread bet – short

Having looked at an example of spread trading as markets rise, now let’s look at a financial spread bet to the short side, or as markets fall. Making money from a falling market or the “short side”, is perhaps where financial spread betting really comes into its own, but is often demonised by the press and the public. In the last few months, and whenever a market falls fast, the speculators are blamed for taking advantage and causing the fall, which in my opinion is absolute rubbish. No group of traders or speculators have the ability to dramatically move a market, and it provides a simple explanation for the press and media to use. The Prime Minister and other government officials then join the fray, speaking utter drivel about a subject they know nothing about. What has made me laugh in recent months is the ban on short selling introduced in a vain attempt to protect the share prices of the UK banks – to their great surprise prices have continued to fall! They are probably wondering why. The first reason is that everyone is selling as they no longer wish to hold bank shares and also need cash quickly from liquid assets, secondly the speculators have moved across to spread betting platforms to continue taking advantage of the falls anyway, and thirdly the markets are manipulated by the market makers who are simply buying shares cheap.

Whether you are a professional trader, or simply a novice retail speculator, there is one thing you must do, and that’s trade both sides of the market. You cannot simply trade when markets are moving up for two reasons. Firstly, it will colour your judgement as subconsciously you will always be convincing yourself that prices are set to rise ( because this is the only direction you can trade) and secondly this will only allow you to trade 50% of the market! Financial spread betting provides the ideal solution allowing you to make money when markets are falling in price, and in a very simple way. I won’t bore you here with how you short a stock in the cash market, but it’s complicated and you need a margin account.

So, let’s start and see how we use financial spread betting to make money from short selling ( short just means making money when prices fall). If we take an example from the oil market, and again we will use a futures contract as we are taking a medium to long term view. We decide to trade the December Brent Crude Futures, and on checking the spread we find they are quoting 6319 – 6324. Now two things to note – firstly the Brent Crude is a monthly contract, and secondly the quote is four figures. The quote looks slightly different this time as the unit exposure ( i.e. the unit you are betting on ) is 1 cent, or 0.01 as oil is always quoted in US dollars per barrel.

In this case our view of the market is that daily oil prices are set to fall in the medium term, and therefore we are going to go “short” and sell a contract this time. Again we are new to trading so we choose the minimum bet size which this time is £1 and open our trade by selling at 6319 ( remember we buy at the higher price and sell at the lower, so in this case we open our trade by selling at the lower price). A few weeks later, oil prices fall further and the spread quoted is now 5923 – 5927 as we forecast, and we decide to close out our trade before expiry.

  • December Brent Crude – Opening Trade : Sold at 6319
  • December Brent Crude – Closing Trade : Bought at 5927

Now remember that in order to close our position, we ALWAYS have to do the exact opposite of our opening trade. In this case we placed a SELL order to open, so we must place a BUY order to close. Again this can be confusing for the new trader, so please make sure you are comfortable with this detail. Again we make sure we are buying a £1 December Brent Crude Future contract to close. Here again we have made a profit which in this case is 6319 – 5927 or 392 units x £1 = £392 – very nice! And more importantly we have made this from a market that is falling. This is how easy it is to trade the short side of virtually any market using financial spread betting with our first financial spread bet in a falling market.

Finally, and just to be balanced, assume we had been wrong, and the market had in fact risen, not fallen as we had hoped. Assume it rises to 6620 – 6616 at expiry, what are our losses?

  • December Brent Crude – Opening Trade : Sold at 6319
  • December Brent Crude – Closing Trade : Bought at 6620

We were wrong, and our loss is 6319 – 6620 or – 301 units x £1 = – (£301). Imagine if we had bet at £10 per unit – I will leave you to do the maths yourself, but my rule of thumb is start trading using the minimum amounts for a minimum of 12 months before you increase your bet size.