After last Thursdays mentoring session, I've received a fair amount of email regarding the ins and outs of Spread Betting. This material was written a few years ago when spread betting was all the rage; I'm reviving it for educational purposes. Enjoy.
Trade Smart...
~Duane Gott
"Spread betting is quite similar to the options and derivatives marketplace as it is a high-risk speculation on the direction of a particular index or underlying asset. There are a few caveats to spread betting that traders need to be aware of before jumping into these types of speculations. Before we get into that, let’s talk about some facts about spread bets.
Traders do not need to own the underlying asset to make a speculation about that asset. Options work the same way, you don’t necessarily own MSFT stock, but you own the call or put; basically the direction of MSFT.
Spread betting is defined as a gambling and not legal here in the United States.
As with most trading instruments, there is the possibility for significant financial loss. Remember, the markets reward risk.
Spread bets are not handled through traditional brokers. There are trading firms that specialize in Spread Bets.
Let’s work with an example to see how a Spread Bet works...
QQQQ is currently trading at $40. The trader believes that this price is severely undervalued and is headed up. The trader places a $5 bet. This means that for every penny QQQQ goes up, the trader makes $5. Remember, the trader did not buy any shares of this stock, only placed a speculative bet on the direction of the stock. To receive $5 for every penny of upside, a typical trader would have to purchase 500 shares of QQQQ. When the price of the stock is $40, this equates to $20,000 of buying power. The “Spread Bet Trader” utilized significantly less capital but may yield the same return as the standard trader.
The basic premise behind the “Spread Bet” trade is the spread; hence the name. When a trader wishes to place a spread bet, they are given a couple of important numbers about the trade. The first of these numbers is the Spread Price. The Spread Price usually looks something like this…..
Spread Price: QQQQ $40 – $42
This means that if you believe QQQQ is headed up, you would place a spread bet at $42. This is the trading equivalent of buying the ask.
If you believe that QQQQ is headed down, you would place a spread bet at $40. This is the trading equivalent of selling the bid.
Knowing this…let’s outline the life of a spread bet trade.
Symbol: QQQQ
Bet = $5
Spread Price $40-$42
Long Entry Price = $42
.01 movement = $5
If the price of QQQQ goes to $50…..
$5 bet (X) $8 = $4000 Profit
As we can see, as potentially lucrative as Spread Betting may be, there is a large amount of financial risk in this type of speculation."
Ok now what's the downside? $5 the bet amount.
What do I lose if QQQQ goes to 40 instaed of 50
I'll take those odds all day.
Posted by: Rob | March 24, 2011 at 08:45 PM
One very important aspect about spread betting is the platform you use. Most of them are extremely discretionary. Some will knock you out of your bet by freezing the bet if it goes against them. I was trying out spread betting sometime back and soon as my bet went in my direction giving me GBP 3,700, IG Index, a company in the UK claiming to be the largest in the world, froze the bet and when it reopened the win was less than half. Some companies will take out your profits in roll over. This happens every night. Do look at the company carefully before getting in to it. I stopped after a few weeks of research. If Forex market is unregulated and most manipulated you have to step in to the world of Spread Betting with certain companies to experience manipulation.
Posted by: Arun Kohli | April 12, 2011 at 02:14 PM
I think the most important thing (please correct me if I am wrong) is to watch your bankroll. I have been playing Poker and I think it is quite similar. If you want all in few days than you will burn your bankroll very quickly also on online trading. On this point, how much would be the ideal bankroll to start with?
Posted by: Marco Narardi | May 12, 2011 at 03:17 PM
d I think it is quite similar. If you want all in few days than you will burn you
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