What is spread betting?
Among the many opportunities for trading, hedging or speculation in the financial market, spread betting attracts those who have a wealth of expertise in identifying price changes and are good at profiting from speculation. One thing should be clear: Spread betting is currently illegal in the United States.In other words, in some European countries, especially in the UK, it is still a legal and popular practice. Therefore, all examples cited in the strategies below are in British Pounds or British Pounds (£).
Spread betting has high risk, but it also has high profit potential. Other features include zero tax,High leverage and wide bid-ask spreads. If spread betting is legal in your market, then you can follow the following strategies.
- Spread betting allows people to speculate on the direction of financial markets or other activities without actually owning the underlying securities; they are just betting on its price movements.
- A variety of strategies are used in spread betting, from trend tracking to news-based betting.
- Other traders hope to take advantage of rare arbitrage opportunities by establishing multiple positions in mispriced markets and realigning them.
Technical analysis strategy
Popular bookmakers, such as those in the UK City index Allow spread betting in thousands of different global markets. Users can make diversified bets on assets such as stocks, indices, foreign exchange, commodities, metals, bonds, options, interest rates and market sectors.For this reason, bettors usually apply trend tracking, trend reversal, breakout trading, and momentum trading strategies for various tools and various asset classes (such as commodities, foreign exchange and stock index markets).
Spread betting around company behavior
The actions of the enterprise may trigger a round of spread betting. For example, suppose a stock declares a dividend, and the dividend is subsequently ex-dividend (meaning that it expires on the declared ex-dividend date). Successful bettors pay close attention to the annual general meeting (AGM) of a particular company to try to understand any potential dividend announcements or other important company news.
Suppose a company whose stock currently trades at £60 declares a dividend of £1. The stock price started to rise to the dividend level: in this case, it was approximately £61. Before the announcement, spread traders held positions designed to profit from this sudden jump. For example, suppose a trader enters a long position of 1,000 shares at a price of 60 pounds and moves 5 pounds per point. Therefore, in our example, as the price increases by 1 pound after the dividend is announced, the trader gains:
5,000 GBP = (1 GBP x 1,000 shares x 5.00 GBP).
Similarly, bettors will seek to take advantage of the dividend ex-dividend date. Suppose that on the day before the ex-dividend date, the stock price was £63. Traders can hold a short position of 1,000 shares with a spread bet of £10 per pip. The next day, when the dividend expires, the stock price usually drops by 1 pound (now maturing) in the dividend amount, to about 62 pounds.
The trader will close the position by earning the difference: in this case, the profit is £10,000:
10,000 GBP = (1.00 GBP x 1,000 shares x 10 GBP per point).
Experienced bettors will also combine spread betting with some stock trading. So, for example, they may additionally hold a long position in the stock and receive cash dividends by holding the stock after the ex-dividend date. This will allow them to hedge between the two positions and earn some income through actual dividends.
Build entry and exit
Constructing trades to balance the level of profit and loss is an effective strategy for spread betting, even if the odds are usually against you.
Assuming that on average, a hypothetical trader named Mike has won four out of five spread bets with an 80% win rate. At the same time, the second hypothetical trader Paul won two of the five spread bets with a win rate of 40%. Who is the more successful trader? The answer seems to be Mike, but it may not be the case. Constructing your bet with a favorable profit level may change the rules of the game.
In this example, suppose Mike takes the position that he wins 5 pounds and loses 25 pounds every time he wins. Here, even with an 80% winning rate, Mike’s profit would be erased by the £25 he had to pay on a wrong bet:
(0.8 x £5.00 – 0.2 x £25.00) = –£1 loss
In contrast, suppose Paul earns £25 for each winning bet, and loses only £5 for each losing bet. Even with a 40% winning rate, Paul still made a profit of 7 pounds (0.4 x 25 -0.6 x 5 pounds). Despite losing 60% of the time, he ended up as a winning trader.
Spread betting usually pays attention to the price changes of the underlying asset, such as market indexes. If you place a bet by moving 100 pounds per point, a 10-point index movement can quickly generate a profit of 1,000 pounds, but a movement in the opposite direction means a similar loss. Active spread traders (such as news traders) usually choose assets that are highly sensitive to news items and place bets based on a structured trading plan. For example, news about national central banks adjusting interest rates will soon reverberate through bonds, stock indexes, and other assets.
Another ideal example is a listed company waiting for the results of bidding for major projects. Whether a company won the bid or won the bid means that the stock price will fluctuate in either direction, and spread traders will establish positions based on these two results.
Arbitrage opportunities in spread betting are rare, but traders can find some arbitrage opportunities in some less liquid instruments. For example, suppose the current value of a low tracking index is 205. One spread betting company offered a closing price of 200-210 for the bid-ask spread, while the other offered a spread of 190-195. Therefore, a trader can go short at $200 in the first company and go long at $195 in the other company for 20 pounds per point.
- scene one: The index closed at 215. Her short position lost 15 (200-215), but her long position increased by 20 (215-195).
- Scene two: The index closed at 201. Her short position lost 1 (200-201), but her long position gained 6 (201-195).
- Scene 3: The index closed at 185. Her short position gained 15 (200-185), but her long position lost 10 (185-195).
In each case, she still made a profit of £250, because she netted 5 points at £20 per point. However, such arbitrage opportunities are rare and depend on the spread trader detecting pricing anomalies in multiple spread betting companies and then taking timely action before the spread is consistent.
The high profit potential of spread betting matches its serious risk: a change of just a few points means a huge profit or loss. Traders should only try spread betting after they have gained enough market experience, know the right assets to choose and perfect the timing.