Why do Spread Bets have an Expiry Date?

Q: How long does your bet last?


A: It's one thing deciding whether a price will go up or down; but when you place a spread bet, you also need to specify a timeframe.

There are two types of spread bets: bets that close at the end of a trading session (i.e. finish when the markets close) or bets that end at the finish of the quarterly cycle: the end of March, June, September or December. For instance you can place a spread bet on whether NEXT (Lon: NXT) will fall in a trading day or on where it will finish at the end of June.

This doesn't mean that if you make a quarterly bet you have to leave the spread bet open till the expiry date, in fact you can close the position at any time until the expiry of the bet. In fact, you will be able to close a bet at any point during the trading hours. You could also rollover daily or quarterly bets into the next trading day or quarterly cycle if they haven't reached your target price or you are waiting for news. Rollovers allow you to extend the lifetime of a bet that is nearing its expiry date by 'rolling' it into the next contract period. This will involve the spreadbet being briefly closed and then reopened - if you opt not to roll or close your bet it will automatically close on the expiry date.

Q: Why do spread bets have an expiry date?

A: Spread betting is straight-up betting as the name suggests. The prices are parallel prices not market prices, so you never actually trade the underlying asset classes themselves. Thus, strictly speaking it is subject to betting regulations - not investment regulations even though it still falls under the auspices of the UK Financial Services Authority.

All spread bets legally have to have an expiry date when the profit/loss will be realised otherwise it wouldn't count as a bet. Likewise spread betting providers don't charge actual commissions but make their money on the spread for the same reason. However, bets can be offered as far away as a future price on the FTSE 100 in a year's time (so you have a year before your position closes and you could always roll the position over to the next quarterly!). Similarly you could also roll a daily bet over onto another day.

The upside of this is that there are no taxes or stamp duty. Depending on who you use there are no transaction charges either. Transaction costs are built into the price spreads. It is worth noting that the credit crunch has fuelled a surge in spread betting in Britain, as people speculate tax free on the stock markets rather than sink their capital into turbulent stocks.

Q. What is the difference between an 'intraday' and 'overnight position'?

A: Intraday positions refer to spread bets that are opened and closed within a 24 hour period. This 24 hour period starts everyday after the end of day process at 10pm London time. Overnight positions are positions that are still opened after the end of day process at 10pm London time.

Q: Can you use spread bets for holding out longer term positions?

A: Yes you can! In fact there is a misconception amongst some traders that spreadbetting is only suitable for day traders who jump in and out of the markets multiple times in a day. The real reason why most spreadbetters prefer taking shorter term trades is because of the leverage, which increases losses should the position move against the trader and thus makes it more difficult to run trades without having a wide stop loss.

However, this is false thinking. The very fact that you are worried about leverage would mean that you are probably utilising too much leverage in the first place. Today's very low interest rates have made it possible to hold out positions for much longer periods and in practice it is possible to continue rolling bets over indefinitely. If many weeks and months pass, though, with things not doing what you expected, then your original rationale for the trade will start to look a bit more shaky, so you will tend to close it out, and try something different.

Let's take the case of a £20,000 Vodafone position held over a year. A £20,000 Vodafone (long) spread bet position could maybe cost you up to £500 in financing charges over a twelve month period.

However, you have to take into consideration that when you buy £20,000 of Vodafone shares via a spread bet you will be immediately saving £100 in stamp duty (at 0.5%) compared to buying the actual stock. Also, whereas when buying £20,000 of Vodafone shares would require you to tie up that amount in the position, a long-term spread bet would only require you to deposit a fraction of that (say £3,000).

By purchasing a spread bet, you could keep the remaining £17,000 in a savings account earning interest. If one were to assume a savings rate of 3 per cent, you could earn £510 in interest before tax to help offset your financing charges.

And with a spread bet you don't have to pay any tax on profits if you're right. This is, of course, a great saving. Suppose Vodafone goes up as much as you expect, leaving a gross profit of around £3000. Whereas you might have to pay roughly £540 in capital gains tax on the shares, you'd pay nothing on the same position via a spread bet. Longer term investing with spread betting is discussed further here.

Note: For longer term trading you can still utilise leverage to take on bigger positions than would be possible for the same capital outlay in the underlying market, however it is important to place wider stops and put in more margin than is needed to open the trade (or opening smaller positions than for an equivalent shorter-term trade).

Q: Is there a maximum position size? I wish to bet using large stakes...

A: I'm currently spread betting with IG Index, currently have two spread bet positions running at £200pp and didn't have any problems opening the positions online. I think that if you have a decent enough balance/deposit ratio then they don't really have a problem with larger stakes (you might just have to open multiple positions).

In any case I'm sure there shouldn't be problem with spread betting indices on big stakes. As far as market capitalisation goes in general CFDs/spreadbets are not offered on companies with a market cap of less that £50m certainly the case for any platforms using City Index. IG cover all shares that have a market cap in Xs of 10M GBP and across most major stock exchanges. You may need a particular account type if you deal in US or Canadian stocks more than European. For individual stocks some spread betting firms may limit their exposure to below the notifiable threshold so the ability to take a position will be based on how much they have already. You may be able to increase the trade by using a number of firms.

 ...Continues here - Spread Betting versus Share Dealing

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