Introduction to Spread Betting

Wins and losses on spread bets can be many times your original stake. Depending on the nature of your bet your losses may be unlimited. You should only bet if you are prepared to accept that degree of risk. You should always estimate a worst-case scenario before you bet. Some markets are more volatile than others, so select your stake accordingly as large amounts of liquid risk capital may be required at short notice. Spread betting involves high risk and is not suitable for everyone.

The majority of spread-betting companies offer a comprehensive range of spread betting products across the global financial markets. These include major indices, currencies, commodities and individual equities quoted on leading exchanges, and their associated options. Clients can speculate on a market going in a particular direction or hedge a position they already hold. A spread betting market is often more flexible and liquid than the equivalent market on the underlying exchange.

There are significant advantages of using a spread-betting index over conventional forms of trading:

All profits free of UK Capital Gains Tax*

No commission, brokerage or stamp duty. **

Ability to bet on markets going down as well as up

Instant execution and clear documentation

Fully Interactive On-line Dealing

Extended trading hours (24 hours for certain markets)

Improved liquidity

Low NTR (deposit requirements)

Daily, weekly and additional monthly contracts available

Limited risk bets available on certain markets

Small stake sizes

All bets can be made in Sterling

*Tax laws can change

** Clients are betting on the outcome of the share price and are not taking delivery of a share and are therefore not entitled to dividends.

Subject to meeting all the clients’ obligations, bets may be left to run to expiry OR may be closed at any time during the company’s trading hours relevant to the market in question.

Spread betting companies offer an execution only service and are not registered to give investment advice and should only be dealt with when they are regulated by the Financial Services Authority (FSA).

Stock Index Futures

Markets based on stock indices are very popular and offer many interesting trading opportunities. Clients are able to take positions on whether an index will rise or fall over a period. This can be useful if you do not have a view about specific shares but feel that the market as a whole will move in a certain direction.

If you think a particular market will rise over your time horizon, you can place an up bet (BUY). If you think a market is going to fall over your specified period, you may wish to place a down bet (SELL).

For instance, if you have a share portfolio and are worried about the market going down in the short term it may be cheaper and more efficient to place a down bet rather than sell the entire portfolio. This potentially avoids capital gains tax, brokerage and other charges. A reduction in the value of your portfolio may be partially offset by the bet with a Spread betting company if they move in the same direction.

Spread betting companies offer certain daily markets (as well as monthly and quarterly futures) for betting on a very short-term basis. (A full list of markets covered can be found in Appendix A - 'Market Information Sheets').

Prices are normally available on the most popular markets, including FTSE and Wall Street, from 23.30 on Sunday to 21.15 on Friday, which enables Clients to react to market information as it actually happens.

A rollover facility is available for most markets to allow positions to be extended into a new time period.

Spread betting company futures, which are left to expiry, do NOT incur any additional spread.

Note: Futures will generally trade at a different price to the underlying cash market. This is to reflect the cost of funding and dividends between the trade date and the futures expiry date. When interest rates are higher than dividend yields the future will tend to trade at a premium to the cash market and vice versa. Futures will tend to move more rapidly than the underlying index and the premium/discount may be very volatile. The premium/discount may also reflect Spread betting company’s risk exposure.

Clients should refer to the Market Information Sheets, particularly in relation to settlement procedures for US markets, which may settle after the last trading day.

Example:

Buying the FTSE 100 future

Opening bet

In January the FTSE 100 cash is trading at 4250. The Spread betting companies quote for March FTSE is 4285/4295 and you decide to buy £10 per point (UP BET) at 4295 in expectation of the market rising.

Closing bet

In February the FTSE 100 cash has risen to 4360. The Spread betting companies quote for March FTSE is 4385/4395 and you decide to close the position by selling £10 (DOWN BET) at 4385

Currency Futures

Spread betting companies provide its Clients with the opportunity to speculate on over fourteen of the major currency pairs traded in the world today.

Significant advantages of spread betting with Spread betting companies over conventional forms of foreign exchange trading are:

It is quicker and cheaper than dealing through a bank

Small bet sizes

Stakes can be in any major nominated currency free of conversion charges

They can quote both the IMM and FINEX currencies, which are the two main worldwide exchanges. The IMM quoted currencies are traded inversely, for example: on the IMM exchange (quoted in Chicago) US$ v Japanese Yen is quoted US$ against Yen. So it may be quoted as 0.008237 Dollars to one Yen, which is quoted as just 8237. On the Finex exchange (quoted in Dublin and New York) it is quoted as Yen per US$, e.g.. 121.40.

You can place an up or a down bet for as little as £1/point, depending on the currency.

Example:

Selling GBP/US$ (as a hedge on a foreign currency transaction)

You may want to hedge, or lock in, an exchange rate now for an expensive 'once in a life time' month long holiday to the USA for you and your family. You know that you are going to spend £15,000 during your family vacation in three months time. You want to hedge that exposure now against any adverse movement in the exchange rate, so you do the following:

Opening bet

You call Spread betting companies and we are quoting GBP/US$ for 3 months time as 15610/15630. You sell £1 a point at 15610 as a hedge for your £15,000 spending money, as you do not want the pound to get any cheaper against the dollar.

Closing bet

At the time of your holiday, Spread betting companies are quoting 15030/15050. You buy back your £1 and close the bet at 15050, thus making a profit of £560. This will effectively mean that even though the exchange rate has moved against you, the profit from the trade with Spread betting companies has offset this.

Of course if the exchange rate had moved the other way, then you would have lost to Spread betting company, but gained through a better exchange rate for your holiday.

Other Financial Futures

Spread betting companies quote futures prices across a whole range of financial instruments including bonds, short-term interest rates, metals and other commodities (refer Appendix A - 'Market Information Sheets'). Clients may use these to hedge a financial exposure or take a view on a particular market.

Explanation of Short Sterling futures

There may be instances when a customer would like to bet on the direction of UK interest rates, and where they will be at a future date - possibly to hedge their mortgage payments for example.

This can be achieved by betting on the 'Short Sterling' future, which is a market on where 3 month LIBOR will be in the future. (3 month LIBOR is a interest rate which Banks can deal with each other, but it in essence it moves approximately in line with the Base Rate).

For example MAR 02 Short Sterling might be quoted as 96.00. This implies that the market forecast for 'LIBOR' on the 3rd Wednesday in March 2002 is 100 - 96.00 = 4%.

Example:

Buying Short Sterling future (as a hedge for a fixed mortgage)

If you think that rates will be lower than the 4% shown above, then you could call a Spread betting company for a quote and they would make you for example 95.99/96.03.

Opening bet

You would 'buy' at 96.03 for say £10 a tick. (tick = per 0.01). You buy since you expect rates to fall and this implies the Short Sterling future will rise.

Closing bet

If you were right and rates were actually 3.75% then the market make-up would be 96.25 (100 - 3.75).

This may be a suitable strategy if you have a fixed rate mortgage but believe that rates are coming down. If rates were to rise however the position would show a loss. You can bet as far forward as 2 years and possibly up to 4 years, depending on market liquidity.

Explanation of Oil futures

The Spread betting company quotes UK Brent Crude or the American West Texas Intermediate (WTI). You can bet up to 3 months in the future and are effectively betting on what the price of a barrel of oil will be on that future date.

Example:

Buying oil futures

You may have a strong feeling on what the future price of oil is going to be, or at least whether it is going to go up or down from its current level. You might have the view that OPEC may cut production in order to reduce the world oil supply and thus force the price up. If you think oil is going up then you could ask us for a Brent Crude Oil quote for 3 months time.

Opening bet

We might make 18.90/19.02. You would bet, say £5 per tick, that it goes higher than $19.02. If in a few weeks, or for that matter an hour later, the price goes up then you could take your profit. This profit would be the amount of ticks you had made multiplied by your stake. (A tick = 0.01$ per barrel).

Closing bet

If after a few weeks you were correct and decided to take your profits and closed the bet at $20.24 then you would have made 122 ticks profit.

Of course if the price had gone down to a level you were not comfortable with, you could have closed the position at a loss on our quote at that time.

Order Types

Spread betting companies offer a range of Order Types:   Limit orders - Sell above or buy below the market

Stop orders - Sell below or buy above the market

OCO (One cancels other) orders - Combination of two orders

GFTD (Good for the day) orders

GTC (Good until cancelled) orders

Please note that, unless otherwise specified, futures orders are assumed to be left on a GTC basis and basis "Spread betting companies" quote.

None of these order types are 'guaranteed', with the exception of guaranteed stops. Please refer to the next section entitled 'Limited risk betting'.

For further information on order types please refer to the Market Information Sheets and section 12 of the Terms and Conditions.

Limited risk betting (using Guaranteed Stops)

Clients may limit their risk when betting on leading market indices. This allows the Client to choose a stop loss level, which is guaranteed and will be executed at that level even if the market gaps through the chosen level. For this service Clients pay a small premium at the time of opening the bet. Please note that guaranteed stop loss orders are basis "Spread betting companies quote" / "Our quote" and deemed good until cancelled.

Guaranteed stops are only available at time of opening bet.

For a list of available markets and limited risk premiums refer to Appendix A - Market Information Sheets.

Example:

Selling the Daily Wall Street with a guaranteed stop loss

Opening bet

The Wall Street cash Index is trading at 8865. The Spread betting company’s quote for Daily Wall Street is 8860/8870 and you decide to sell the market at 8860 for £10/index point as a limited risk trade. Your position is opened at 8860 - 2 = 8858 (2 points is the limited risk premium). You decide to set your guaranteed stop at 8928, which is 70 points away from your opening level.

Closing bet

Following an unexpectedly good non-farm payrolls number the market gaps higher to stand at 8990. Your position is automatically closed at 8928.

This is your maximum loss regardless of what happens in the underlying market. Your profits are not limited by this guaranteed stop.

Options on Futures

Spread betting companies offers bets on options prices on a wide range of markets including most of the major indices.

An option is the right, but not the obligation, to buy or sell a given market at a fixed price (called the 'strike price') at some fixed point in the future (the 'expiry date'). The right to buy is known as a 'call option' and the right to sell is known as a 'put option'.

These contracts have prices, which are typically a small fraction of the price of the underlying. For example with the FTSE 100 at 4550 in mid April a call option with a strike of 4700 expiring in June might have a value of 150 points.

The value of an option comes essentially from two components. The first is how valuable the option is already (known as the 'intrinsic value') and the second component comes from the likelihood of the option's value increasing with market movements over its life (known as 'time value'). On the expiry day of an option there will be no time value left, and the option's value is all intrinsic. (Note that because an option is a right, not an obligation, its value can never be negative).

You can place an up bet (buy) or a down bet (sell) on the price of an option. Placing an up bet (buying) on an option is often a good way to take a view on a market whilst having only a limited risk, as the maximum possible loss is the price paid for the option times your stake.

Placing a down bet (selling) on an option is a much riskier proposition as by selling them you are accepting a limited possible profit (the price you sold at multiplied by your stake) whilst having potentially unlimited losses.

Buying a call expect the market to rise

Selling a call expect the market to fall

Buying a put expect the market to fall

Selling a put expect the market to rise

Once you have bet on the option of your choice you are free to run that bet to expiry, or to close the bet at any time during normal trading hours for options, provided there are sufficient funds in your account and you meet margin calls in accordance with our Terms and Conditions.

Please ensure you understand the risks involved before betting on option prices - should you require any clarification we recommend you seek independent advice. You are also free to contact our sales desk at Spread betting company.

Spread betting companies quote competitive two-way prices, which include all costs, to enable Clients to bet on option prices going up or down.

For certain markets it may be possible to bet in additional months and also out of hours.

Example:

Betting on a put option price on the FTSE Stock Index future

Opening bet

In March the FTSE 100 is trading at 4390 and you think the market may fall. The Spread betting companies quote for the June FTSE 4100 put option is 225/235 and you place an up bet of £20 per point at 235. Your maximum loss is limited to 235 x 20 = £4,700, yet your potential profits are much larger.

Closing bet

Two weeks later the FTSE 100 is trading at 4175 and the Spread betting companies quote for the June FTSE 4100 put is 300/310. To close the position you sell (down bet) £20 per point at 300.

Equity Futures

Spread betting on equities has seen dynamic growth from when Spread-betting companies first introduced the service in relation to the FTSE 100 companies.

Since then the number of equities offered has been expanded to include all major companies from the UK, US and European markets.

Weekly equity futures have also been introduced to provide a short-term alternative to quarterly futures.

The spread-betting concept* remains straightforward and offers significant advantages over conventional share trading: All profits are free of UK Capital Gains Tax†

Ability to bet on equity prices going down as well as up

No expensive foreign exchange costs - bet on foreign equities in sterling

Low margin requirements (NTR) - starting from 10% of the contract value

Extended trading hours (for certain equities)

  Limited risk betting (for certain equities)

Bets are denominated in pence, cents or euro cents depending on the currency of the underlying equity.

†    Tax laws can change.

*    Clients are not actually buying the underlying equities but betting on the movement in equity price.

Quarterly Equity Futures

Spread betting companies quotes quarterly equity futures for both the nearest two months of the March, June, September and December cycle and the expiry day is the Tuesday before the third Wednesday of the contract month.

The future or forward price is derived from the current underlying market bid and offer price. This is adjusted for the cost of funding until the future date. If the equity is likely to go ex-dividend before the future date the value of the estimated net dividend is deducted from the future price since the holder of a spread betting contract is not entitled to any dividends. The Spread betting companies spread is then applied around the adjusted future price.

Spread betting companies offers beneficial rollover terms to enable positions, which are close to expiry, to be rolled into the next quarterly futures contract.

Example:

Buying the British Telecom quarterly equity future

Opening bet

In January, British Telecom is trading at 273/274 (i.e. 273p/274p) and you think the share price is going to rise. The Spread betting companies quote for June British Telecom is 280/284 and you buy (UP BET) for £20/penny at 284 (Equivalent to buying 2000 shares)

Closing bet

The share price moves up over the next three weeks to 314/315. The Spread betting companies quote for June British Telecom is 318/322 and you sell (DOWN BET) for £20/penny at 318.

Weekly equity futures

Weekly equity futures are designed to offer a cost efficient betting alternative for Clients who wish to bet on a short-term basis.

Weekly equity futures are quoted around the current underlying share price and expire each Friday. Subject to maintaining sufficient funds in your account, the bet can be closed at any time, during relevant Spread betting companies trading hours, or rolled into the following week or left to expiry, giving a flexible dealing strategy.

The product has many similar characteristics to quarterly equity futures but may be more effective for short term betting strategies. The bid/offer spread is usually around half the normal quarterly spread.

Example:

Buying the British Airway weekly equity future

Opening bet

You think that the British Airway share price is going to rise in the short term. The current market price is 155/158. The Spread betting companies weekly equity future for British Airway is 154.4/158.6 and you buy (UP BET) for £10 / penny at 158.6

Rolling over the bet into the following week

On Friday British Airway is trading at 159/160 in the market and you decide to rollover the position into the following weekly future. The current position is closed at the mid price of 159.5

A £10/penny up bet is now opened on the following British Airway weekly equity future at (159.5 x 1.0025*) = 159.9

*Long weekly equity future positions are rolled over at half the Spread betting companies weekly equity future spread.

Closing bet

During this week the share price falls to 152/153 in the market. Spread betting companies quote the weekly future as 151.4/153.6. You place a sell (DOWN BET) to close your position and sell £10 at 151.4

US and European equities

Spread betting companies quotes leading equities from the NYSE, NASDAQ and European bourses. Contracts are similar to UK quoted equities, although trading hours will follow those of the local market. Bets can be made in Sterling thus removing the expensive foreign exchange costs associated with trading foreign equities. For US shares bets are denominated in cents and for European shares bets are denominated in euro cents.

Contracts can be quoted on a weekly or quarterly basis.

Example:

Selling the Intel quarterly equity future

Opening bet

In January Intel is trading at $18.40/45 and you think the share price is going to fall. The Spread betting companies quote for the March Intel is 1850/1875 and you sell (DOWN BET) for £1/cent at 1850.

Closing bet

Results exceed expectations and the share price moves up to $19.40/45 a week later. The Spread betting companies March quote is now 1945/70 and you decide to take your loss and close your position by buying £1/cent at 1970

Order Types

These are available on leading equities (refer to Section 2.4).

Unless specified by the Client at the time of placing the order, Spread betting companies will assume that orders are basis "Spread betting companies quote" for the future concerned and are deemed good till cancelled (GTC).

Limited risk equity betting (using Guaranteed Stops) Clients may limit their risk whilst betting on leading equity futures. Clients pay a small premium, which depends on the length of the contract taken out and the underlying share price, at the time of opening the bet.

Example:

Selling the quarterly Barclays future as a limited risk bet

Opening bet

In January, Barclays is trading at 473/474 and you think the share price may fall. The Spread betting companies quote for March Barclays is 470/474 and you sell £20 per penny (equivalent to 2000 shares) as a limited risk bet. Your position is opened at 470 - 4 = 466 (limited risk premium is maximum 1% of the Spread betting companies price). You decide to set your guaranteed stop loss at 516 (50 points away from your opening level).

Closing bet

In February, the market gaps higher to 2280 from 2092 as the market anticipates a merger with Citibank. Your position is automatically closed at 2200.

Comparison of share buying and spread betting for XYZ plc

Shares

1 Jan 2002 Position Bank Account Spread Betting

1 Jan 2002 Position Bank Account

Balance Purchase 20,000 +20,000 XYZ £14,210.00

-£14,000.00 Balance Buy £200/pt  +£200 Jun XYZ £14,210.00

Stamp Duty   -£140.00 Stamp Duty   £0.00

Commission (1%)   -£70.00 Commission   £0.00

Total +20,000 XYZ £0.000 Total +£200/point at 72p(equivalent to 20,000 shares) £14,210.00

1 Jan 2002

(Closing)     1 Jan 2002

(Closing)    

Sell Shares at 72p -20,000 XYZ +£15,800.00 Sell £200/point at 79p   £1,400.00(79-72) x 200

Commission (1%)   -£158.00 Commission   £0.00

Bank Interest (5%)   £0.00 Bank Interest (4%)   £94.00

Net Profit   £1,432.00 Net Profit   £1,494.70

Net profit after Capital Gains Tax (40%)   £859.20 Net Profit after all taxes (Income Tax on interest at 40% = £37.88)   £1,456.82

This comparison assumes:

1. The Client holds a credit account and is therefore not required to pay initial margin (NTR).

2. Capital Gains Tax has been assumed at 40%.

3. No dividends are paid for the period.

Options on Equity Futures

Spread betting companies offer bets on options prices on a wide range of equities. Clients are able to open positions by placing an up bet in anticipation of the option price rising or a down bet with the expectation that the option price will decrease. The Spread betting companies spread includes all dealing costs. Option bets can normally be closed during the trading hours in the underlying options or cash settled on expiry, providing there are sufficient funds in your account.

Example:

Making an up bet bet on a Vodafone call option

Opening bet

It is January and Vodafone is trading at 85/86 in the market. You believe that Vodafone will rise over the forthcoming months but wish to limit your losses should there be an unforeseen downward movement. The Spread betting companies quote is 8/11 for a June Vodafone 100 call and you decide to buy £100 per point to open the bet. If, on the expiry day in June, Vodafone closes above 111p (100 [strike price] + 11 [option premium]), you will make a profit. The maximum you can lose is 11 x £100 = £1,100, regardless of how far the price of Vodafone may fall.

Closing bet

Three weeks later Vodafone is trading at 110/111 and you decide to close the position. The Spread betting company’s quote for the June Vodafone 100 call is 20/21 and you sell at £100 per point at 34 to close the bet.

The Spread betting companies Property Futures

Most of the top Spread betting companies have introduced a range of innovative products that enable Clients to bet on the changes in house prices across different areas and property types.

Spread betting companies Property futures provide the opportunity to bet on house prices going up or down and are therefore suitable for the speculator or someone wishes to hedge an exposure.

Spread betting companies Property futures are available on the average house price for the following regions: England and Wales, Greater London, Wales, South East England and Northern England.

Futures on more specific property types are also available for London Boroughs: Islington (flat/maisonette), Hammersmith and Fulham (terraced house), Kensington and Chelsea (terraced house).

Futures on more specific property types are also available for London Boroughs: Islington (flat/maisonette), Hammersmith and Fulham (terraced house), Kensington and Chelsea (terraced house).

Until now there has been no easy way to trade on the movement of house prices.

A large percentage of personal wealth is tied up in housing.

House prices play a key role in economic sentiment.

Selling the main residence to lock in a gain can involve significant expense and upheaval.

Residential property has become a popular personal investment medium with the proliferation of "buy to let" arrangements.

The relative under performance of equities during the past few years, partially due to the 'Technology, Media & Telecoms' boom and bust, has made investors seek opportunities elsewhere.

Relative price differences between different regions, particularly the North and South, have made relocation a difficult financial proposition. 

Someone looking to buy a house in the future may wish to protect themselves from prices rising above current levels. 

Spread betting companies Property futures are based solely on the Residential Property Price Report as published quarterly by HM Land Registry.

(Land Registry Data is based on actual house sales that have been completed and registered with HM Land Registry, whereas other house price indices that are produced by major banks and building societies are not generally based on underlying transactions, but measures such as estate agent valuations and forecasts.)

Example:

Buying the England and Wales House Price future

You wish to buy a house in 6 months time, but think that prices may rise beforehand and wish to protect part of your exposure to this potential rise.

Opening Bet

The Spread betting companies quote for the June 2002 England and Wales House Price future is 122.6/124.1 (i.e. £122,600 - £124,100). You buy £500 per point at 124.1 (equivalent to a contract value of £500 x 124.1/£1,000 = £62,050).

Closing Bet

You run the position to expiry and the closing level is 128.7 (i.e. the average house price for the region is £128,700), as house prices have increased during the period.

Please note you do not have to wait until expiry in order to close a position - bets can be closed at any time during Spread betting companies trading hours for the market in question.

Example:

Selling the Islington (flat/maisonette) future

You own a flat in North London, which has appreciated substantially during the last 5 years. You think that property is now looking expensive and would like to protect part of your investment should prices decline.

Opening Bet

The Spread betting companies quote for the March 2002 Islington (flat/maisonette) future is 214.9/219.8 You sell £200 per point at 214.9 (equivalent to a contract value of £200 x 214.9/£1,000 = £42,980)

Closing Bet

Property prices continue to push higher helped by a favourable economic backdrop. After 2 months you decide to close the position. Now the Spread betting companies quote for the March 2002 Islington (flat/maisonette) future is 221.3/226.2. You buy £200/point at 226.2.

The Millionaire Index

This is a variation on the Property futures. The Millionaire Index is based on the number of residential property sales greater than £1,000,000, in England and Wales, which take place in a three-month period.

Example:

Buying the Millionaire Index

Opening Bet

In January, the Spread betting companies quote for the June 2002 Millionaire Index 465/485 You buy £50 per point at 485

Closing Bet

Four months later you decide to close the position. Now the Spread betting companies quote for the June 2002 Millionaire Index is 540/560 you sell £50 per point at 540

Here is a list of some of the main betting exchange sites.

www.cityindex.co.uk

www.sportingindex.com

www.igindex.co.uk