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Spread betting strategies

Lets look at three of the more advanced spread betting strategies, the first if which is hedging,then we’ll look at the staircase trade, and finally at pairs trading.

If you have an investment portfolio ( and we all do to a greater or lesser extent in our pensions) then spread betting provides an excellent way to hedge your stocks, shares or other investments. Hedging simply means offsetting your risk with a trade which will compensate you, should your investments move in the opposite direction. In other words it’s a form of insurance. Assuming we were holding long positions in shares, then we would look to hedge in other markets, should share prices fall. Now as we discussed earlier, spread betting provides an easy and simply way to sell short, so we can use it to hedge our positions in the cash market. We can do this in several different ways.

The first option we might think of is to short the main index FTSE 100 or other ( 250 or 350), depending on our holding. Should markets fall, then we would be making money on our spread betting, but losing in the cash markets. Now clearly there is no guarantee that as an index falls, all constituent shares fall with it, but this will provide a level of protection. How much you would like to hedge is an individual decision, and clearly what we don’t want is a situation where a 100% move in one direction, results in a 100% move in the other, as we simply stand still! So you will need to decide how much insurance you would like, in other words how many £ per unit price, and using the index as the hedge it may be very difficult to gauge how much an index point fall affects your portfolio. An alternative might be to hedge on the shares themselves. This will be much easier to calculate as you are comparing like with like. The advantage here is that shorting on a rolling daily contract will pay interest, so you are both hedging and earning, but be careful on the the dividends due. Using this strategy is a much neater solution to the same problem, also providing additional benefits, so an excellent way to hedge in my view. The above is just one simple example of how to use spread betting strategies to hedge in other markets, there are ofcourse many others – it’s mainly a question of being creative and thinking a little.

The second spread betting strategy I would like to explain is the staircase trade, a simple strategy but one which works well in spread betting, so please remember it when you have a profitable position. Assume you have opened a long trade which has moved into profit in the first few days, and you started by betting the smallest unit price. In this case consider opening a second position for the same amount, and adding to the position with further trades ( assuming the price continues to move up ) so that you end up with a staircase of trades, opened at different levels. Move your stops up locking in profits as you go to build a riskless position in the trade. Now the converse of this works as follows – assume you have a large position which again is a long trade, and you feel it is near the top of the move but don’t want to close out completely. The option here is to part close the trade and leave the position open but with a smaller unit size. So for example if the position was a £20 per unit price, you might decide to close out £10 per unit, but leave £10 per unit still open. Part closing positions is an excellent way to take some profit “off the table”, but leave the position open should prices continue to move in the direction required.

Using financial spread betting in pairs trading is an interesting strategy, and one for the analysts amongst you. As I’m sure you know, many markets, shares, stocks, indices, commodities and currencies correlate with one another, either positively or negatively. Now there are many pairs to choose, the most common being stocks or shares. The basic strategy is to find two shares that move in the same direction but at different rates, and to then go long and short making money from the differential between the two. Now there are several things to note with this strategy. Firstly, whilst one may outperform the other in one direction, this may change if the overall market changes direction. Secondly, there is no guarantee that this relationship will continue, and thirdly the pairs must be balanced, in other words if the price of one is £2.00 and the other is £3.00, then your unit price on your spread betting trade must be 3/2 on the first share, and £3 on the second otherwise it will be an unbalanced trade. In many ways it is like a hedge, and you hope the profit on one will outweigh the loss on the other. There are of course, many, many other spread betting strategies, these are just a few to get you thinking! Now let’s look at how and why you would use financial spread betting, rather than futures. If you would like to look at spread betting strategies in more detail then I have developed a new site, just on this topic, so please just follow the link here.