Intelligent Ways of using a Spread Bet
Q: Show me some intelligent ways of using a spread bet...
A: Erm...where shall I start. Apart from using spread betting to save taxes and short shares in a bear market and using margins to boost gains you can use spread betting for hedging purposes or to open a pairs trade and profit from the relative performance of one company in relation to another in the same sector. Other possible ways -:
- For tax planning purposes I sometimes want to sell a share to realise a profit or loss before the end of the tax year but I do not want to give up my interest in the growth prospects of the company. I would therefore sell the share, realising the gain/loss and then buy it back through a spread bet. After 30 days I can close the spread bet and repurchase the share. i.e. in this case you would be using spread betting as a substitute for holding the share. Of course you could have taken an interest in the share through a spread bet in the first place but that is another story.
- Spread betting is also increasingly becoming a tool for tax planning as people wishing to crystallise a loss/gain prior to the 5th April can transfer their stock to a spread bettor's provider. This would crystallize a loss or a gain at this point. However, the company will then turn the stock into a spread bet thereby allowing the client the benefit of any upward movement at that point. If, of course the price does rise this will be free of capital gains tax. For instance at the time of writng I am currently negotiating with a spread betting company for them to buy my shares off my broker and put them into my spread account. The upside to this is that any further gains in the share price are tax free, and the downside is that if the shares fell, and I had to sell for whatever reason, they are not losses I can carry forward. The bet gives you continued exposure to the share without you having to hold it and you could always buy the shares back after 30 days have elapsed. This is sometimes referred to as as bed and breakfasting.
- Use spread betting as a tax efficient tool to convert your taxable profits at a futures broker into tax free gains by taking an exactly opposite position with a spread bet. You can then exit both positions when the futures moves against your position at the broker and thereby the profits are transferred to the spread betting account. Of course you will have to bear the cost of spreads on both sides but that would amount to about 1%. There is a risk that your futures positions will continue increasing in value while your spread betting positions might continue losing value but you would have to be really unlucky to get every trade right with the direct access broker and wrong at the spread betting provider. But of course you could calculate a stop loss level as to when you would close down your spread betting positions contra futures positions taxable value. I know a couple of traders, who have direct access and spread betting accounts and utilise this tax hedging strategy.
- Dividends! If you have a long position in a share, most financial spread betting firms will credit your account with 90% of the value of the dividend you would have normally received had you been holding the physical shares. Some traders and investors actually take advantage of this and use spread bets for this reason: they may have used their CGT allowances for the year already, picking dividends from stocks they hold in their physical share portfolio account, where they hold actual stocks. Financial spread trading allows them to get the benefit of dividends outside this allowance - since spread betting is tax free in the UK. Do keep in mind that you are still only getting 90% of the dividend, not the full value, but at least it does not count towards your Capital Gains Tax allowance!
- Another possible reason for using spread betting is to hedge an option position I hold in a quoted company. In the build up to the exercise date of the options I would sometimes take the view that the share price had reached a price at which I would be happy to sell the shares but I could not sell as the option had not yet been exercised. I would therefore go short by taking out a spread bet and on exercise of the option I would close the spread bet and sell the shares. This gave me a locked in price.
- Another way to trade would be to use the tilted-index strategy. Suppose you are thinking of opening a £100,000 FTSE position. Then choose, say, the 5 names that you think will underperform, and open short positions in those, and then open up longs in the 5 you think will outperform. If you're good you get the beta of the index performance with the alpha of your own better-than-the-market analysis. Mainstream pension funds and insurance companies, previously barred by regulation or internal policy from going short, have started launching funds using the 130/30 strategy - which combines a long-only portfolio with a 30 per cent long/30 per cent short portfolio - produces alpha more efficiently. Not only does it enable managers to profit form stocks moving down as well as up but it counters the biggest objection to short selling - which is that in the long run the stock market tends to move up so it is better to be fully invested in the market. With a 130/30 strategy you are effectively 100 per cent exposed to stocks.
- Some traders simply use spreadbetting as a speculatory tool. Traders commonly use spread betting for profiting from range-bound markets buying near the bottom of the range and selling near the top of the range. Using this strategy you might opt to place your stop loss just below the bottom of the range or just below the top, depending on whether you are going long or short. If you are willing to risk 10 points in order to make 20 points, you should set the the levels of the stop losses accordingly.
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