Rolling Dailies or Longer Term Futures?

Q. What is a Rolling Daily Trade?


A: In the past the majority of quotes available in spread betting were forward date (i.e. futures) contracts. But things have changed, thanks to the 'rolling cash' spread betting daily.

Rolling Daily Trades (or Rolling Dailies as they are sometimes called) are for traders who want to trade an open ended contract which does not need to be rolled over each quarter. The prices of these spreadbets are based on the cash rather than the futures price so you can even check the rolling cash spread bet quotes from your stockbroker and then make a more judicious trading decision as to which investment - the spread bet or buying/selling traditional stocks - is most appropriate at any given time. The spread on these contracts is also tighter than with a quarterly futures contract which makes them ideal for holding positions for a few days/weeks. Rolling trades incur/receive a financing payment each time they are held overnight. This charge is levied directly on your account and will usually be shown on your account summary.

Example: Suppose it is Tuesday and you believe that Vodafone (stock) is oversold and is due to rally now (it is currently trading at 127.25p). The bid-offer quote for Vodafone is currently at 127.25-128.50 and you decide to go long at 128.50 for £50 a pt. In the next few days Vodafone starts to slowly move up but you keep holding the position expecting further upside.

During Thursday's trading session the Nasdaq market makes significant gains, pushing up UK technology Friday's open. Vodafone is now trading at 135.00-136.75 and you sell Vodafone rolling cash at 135p for £50 per point which closes your open position. This translates into a profit of £325 [6.5 (135-128.50) x £50]. The only deduction apart from the spread is the 4 days overnight interest you have been charged on the bet which is just a couple of sterling.

Note that you could also have made a down bet on the price of Vodafone (if you wanted to). Shorting is possible with rolling cash bets as they are not physical shares but an instrument that mirrors the market movement, meaning that it is as simple to sell a share as it is to buy it. Thereby, rolling cash bets allow you to take advantage of falling markets in the same way that you can benefit from a rising market.

Q. What is a rollover?

A: Rolling over contracts means that on contract expiry the current bet is closed and settled and a new bet is opened from the new market level. At contract expiry, the original contract is closed and settled. Your spread trading firm or broker then pays you the balance of the closed contract if it closes at a profit, or if it closes at a loss they will deduct the amount from your account. This profit or loss is calculated on the entry and exit price.

For example say you sold the September Dollar Index short £5 per point at 8200 and on the last dealing day the market closed out at 8000, then you would be paid 200 x your bet size, which in this case is £5. Therefore 200 x £5 = £1000. Your spread trading firm or broker then automatically (assuming that you have given them permission to roll contracts automatically) open the same sized trade in the next active contract, which in this case would be December.

Your new position would now be short the December Dollar Index at £5 per point. This is now essentially a new bet and will be settled when you exit the trade in the same way as normal, with the entry level being the level at which the new December contract was opened.

Different rollover rules apply to different markets. For example at IG Index if you roll over a FTSE daily position it would close at the official closing price and then reopen with a spread of 0.5 points. If it was a FTSE future position then you would pay no spread to close but you would pay the normal opening price when the position is reopened. For rolling a daily UK share position if you are long you would pay UK Libor +2.5% and if you were short you would receive Libor +2.5%.

Q. I just thought that if you open a spread trade it is linked to a particular month. eg. Rio March, and I thought that there would be a deadline (March) when you had to close the bet?

A: You are right - a spread bet will have an expiry (mainly every quarter, for shares other than intraday bets), but most spread betting companies will allow you to roll this over into the next period, and often will do so automatically. Most of them seem to charge 1/2 the spread to roll over, so if the last quote for March was 100-110, it would cost you 5 (multiplied by your stake per point) to roll to June.

Q. So is there a fee charged by the company for placing the bet/rolling it on? Or is the only 'cost' in the spread?

A: There is a daily financing cost since you are basically borrowing money by taking a margin position.

However on daily rolling bets you don't pay the bid-offer every day, the next day's bet is opened at the same price as the previous day close. Extract from my statement: (usd/jpy)

26/03 10:28 You bought at 9940 (opening bet)
26/03 22:23 You bought at 9940 and sold at 9901.5
26/03 22:23 You bought at 9901.5
27/03 12:34 You bought at 9901.5 and sold at 9991 (closing)

To summarise I bought the USD and sold JPY at 99.4. Later that night it closed at 99.015 and a loss was posted to my account. Immediately an identical bet was automatically opened at 99.015 (why it isn't midnight I'm not sure), and the following day I closed out the bet at 99.91 and a profit was posted to my account. The financing charge for 1 day was £1.60 per £1 per point (£1 per point being £100 per Yen)

Now on futures the financing charge is built into the price so you don't pay financing except that you pay a wider bid/offer spread on the futures.

Q. What are the differences between the Daily Cash Indices and Daily Rolling?

Because I know that daily rolling means you can roll bets over to the next day but how does stopping daily cash indices stop arbitrageurs?

A: The Daily Cash contracts are priced based on a fair value relationship with the Futures price. The daily cash price is determined by taking the Futures price received and discounting this price to give a daily cash market. For instance, today the FTSE 100 Daily Cash is set 21 points lower than the December Futures contract. While this tends to resemble the actual cash Index - for example the FTSE Index or Dow Jones Index it will not be exact. However, usually a spread betting company will settle the Daily Cash contracts based on the actual official Index closing settlement figure of the day.

The only difference between a daily cash and a rolling is the fact that a daily cash will expire when the market expires, whilst a rolling will roll over every day until you close the position or do not have the margin to cover the position. You will note how both markets have exactly the same price.

So the Daily cash closes out at the 4:30 post auction price whilst the rolling rolls and doesn't close.

If Cantor Index quote you 6124-6125 and IG quote you 6126 - 6128 you can buy with Cantor and sell with IG. You are guaranteed to make 1 tick at expiry on the cash contract. If you placed a trade on the rolling contract you would simply be rolled into the next days contract and if you wanted to close this out, you would have to pay a closing spread i.e. no arb.

Q. If I buy a 'rolling' contract and leave it overnight for a few days, or a week or so, when does interest get charged, or does it at all?

A: With regards to the rolling bets you will normally find that these get rolled on a daily basis. This rolling takes the form of one bet being closed and a new one opened. If you check the levels of this opening and closing you might find that they differ slightly and this is to reflect the cost of carry which you are asking about.

Rolling and Monthly contracts both operate in the same way. You need to understand that the contract which you are betting on is the firm's version of that contract. The monthly contracts are therefore calculated through mathematical formulae by taking into consideration all know events between the current date and the expiry date of the contracts. The monthly contract has an interest premium priced into it which decays over the course of the contract which in turn means that slowly the futures price draws towards the cash (or rolling) price as time goes forward. If you are long the cash at ex div then you get paid the dividend and if you are short the cash then you have to pay the dividend.

Q. What reasons would one have for choosing a FTSE 100 Apr (say) over a FTSE 100 Year end (say) or even FTSE 100 Rolling?

I have just started using spread bets to go both long and short on the FTSE 100, generally keeping positions open for up to a week. I have been using FTSE 100 - Rolling because I understand how it varies and what the charges are. My bet automatically rolls over every night until my orders are met or I close the bet.

Could you explain to me how the futures work, do they get cancelled at the end of every day? Do they roll over until the expiry is met? Are the charges more or less than the rolling? What reasons would one have for choosing a FTSE 100 Apr (say) over a FTSE 100 Year end (say) or even FTSE 100 Rolling? Sorry for all the questions...I'm just confused.

A: When you do a quarterly bet then all you pay is the spread. If you do a daily rolling bet then the spread is much tighter, more like the spread found in the market but you pay a finance charge each night (or get paid one if short) based on a formula your spreadbet company will provide.

So with some spread betting companies you can do a daily bet which expires same day. Or a rolling bet which settles each day and automatically reopens next day, and continues doing so till whenever cancelled. Or a 'near week' bet which you open on any day but which expires at close on the coming Friday. Or a 'far week' bet which you open any day and which runs to the Friday of the next week. Or a bet which runs to the end of a month. A 'near quarter' bet (at present expiring September 19), or a 'far quarter' bet expiring December 19 (quarterly bets expire on the Tuesday before the third Wednesday in each third month, i.e. Mar,Jun,Sep,Dec). One or two firms will take a 'distant quarter' bet expiring say next March - but the longer the timeframe the greater the spread they add on top of market spread - and the further away their quoted spread is likely to be 'centered' in relation to where the market spread currently is.

The spread they add for each timeframe is to a known formula - so you can always work it out yourself before you contact them (adding it to the current market spread) - but the positioning of it (i.e. how far ahead of or behind the current market price) is something they are free to vary - usually affected by what's going on in the futures market for that stock or sector. Use a rolling bet for anything up 2 weeks, a futures/monthly bet has the interest calculated into it using a wider spread and no daily interest charges added each night.

Some spread traders may disagree with me but daily rolling is cheaper only for short term bets and only on larger bets, otherwise quarterly is best. I held Burren on a rolling quarterly spreadbet for nearly 2 years. Expensive relative to holding the shares but all the while my capital was working hard for me elsewhere. It wasn't a plan, it's just the way it worked out.

I choose my date based on how long I envisage keeping my position. Rolling bets are good for intraday trading because you will not pay any interest. However a word of caution most spread bet accounts do not roll over bets where you do not have enough available funds in your account so I would only use rolling if you are sure you will have spare funds overnight. Many people (I have been) are screwed overnight if they have insufficient funds to cope with fluctuations out of trading hours. You only want to close a position when you judge not because you are forced to.

Having said this my spread bets are nearly all quarterly ones - with expiry dates (if not closed sooner) in Mar, Jun, Sep, Dec. In which cases the spread quoted incorporates all costs, and there is no separate calculation of, or billing of, interest. One disadvantage of this (but which doesn't trouble me) is that the spread (incorporating whatever interest element) is calculated on the basis of the bet running full term, even if closed sooner.

In order to encourage clients to continue betting by rolling into the next quarter, firms tend to offer special discount terms during the final week of each quarter - which means the standard terms go outta the window. But they isn't a significant issue anyway, imo (others who are trading ten times my scale might disagree!). Incidentally, you can roll part of a bet and let the remainder expire (though you need to be talking with a dealer who knows that, as some juniors seem unaware).

P.S.: If you have several bets to roll, and you want to save a shilling or two on phone calls - you can email them a list of positions you are interested in rolling and ask a dealer to look at them and phone you back ;o)

Q. What if I'm bullish on BP for a 6 month period, do I have to buy the front month spreadbet and then have to roll it over?

A: Actually you don't have to do this, you can buy the next month out. For instance if the date is June the front month in the quarterly cycle will be September with the next quarterly being December. The December future will have a wide bid-offer spread and generally be priced higher than the September quarterly. However, it will usually still be less expensive to buy the December future (as opposed to the June contract) as you won't have to roll it over (i.e. no rollover charge).

Q. Rolling Dailies - do companies close and re-open bets held overnight settling profits/losses or do they do this at the end of the bet?

I'm a newbie just learning the game via a couple of demo accounts...please be patient with me! ;-)

I recently place a couple of demo rolling daily bets (Sell HBOS) with Capital Spreads & GFT Markets, in order to compare them...I got a bit of a shock when analysing the results???

Capital Spreads only charged me a small fee each night for rolling the bet and the overall profit / loss wasn't calculated until the end of the bet. However, GFT closed and re-opened the bet each night at 9:51pm which resulted in my big loss due a price swing on the first day...overall the price did go down thus my profit with Capital Spreads.

I really like the GFT DealBook360 software application and was swaying that way...however I'm not sure now due to the closing / re-opening of the rolling bets each night. Is this normal practice? Do other spread betting companies operate like Capital Spreads or GFT?

A: This is normal practice, a rolling contract is just that, it rolls over, thus being shut down and re-opened every night and getting charged a small amount of interest.

Different providers have different policies on rolling contracts (some will crystallise profits/losses each day the contract rolls over, others will only crystallise profits/losses when you manually close the contract). All this information will be written in the provider's market handbook and will also be located on the bet at all times and on the contract note when opening the bet - read the small print, these contract notes are written for a reason. This is where details about margin is located and expiry to contract.

That's a daily contract, if you're playing for a future date you can use a future contract then it won't cost you overnight fees and it won't close and re-open every night, but you will pay a higher spread or a higher price for the contract to allow for the interest being built in. If your time is only for a few days or a week then get the contract earliest to your time as this would work out to be the most cost-effective.

I would ask you this, if it was a daily contract and you're unclear of the basics, did you even have a stop loss on this, it obviously wasn't a time based one so was it on a price, if so, how far from the daily moving average as you say it moved heavily against you and you suffered a 'Big Loss' yet allowed the bet to roll over. I ask this because it's common for new traders to try and make some money then when it goes against them, hold onto it, then get confused because they still registered a loss and also had to pay interest and then had a sleepless night wondering what the market would do on open then on top of all that instead of contacting the company direct will post on internet boards. Almost like a cycle. And around it goes.

Lastly, it looks like Capital Spreads don't close and re-open each night as GFT does...Capital Spreads state that they settle the profit/loss at the end of the bet...GFT like IG Index do it each night (close and re-open)...thus why you could only see Capital Spreads taking small fees for rolling the bet each night. There are positives/negatives to the rolling contracts that crystallise gains/losses everyday - great if you are already in profit as they will lock in profit for you without you having to move your stop or reducing size. But if at the time that the position rolls you are negative, maybe because there has been some drawdown then you are effectively realising profits/losses that you wouldn't normally have to with providers who don't close/re-open bets everyday.

Q. I have a spreadbet account with IG and their daily rolling bet is closed each night for settlement and opened immediately again...

Spreadbet Daily Rolling: IG has auto-rollover which closes and immediately opens the bet at the end of the day. However because they actually close it and then re-open it, it means that any loss/profit becomes a real and not a paper loss/profit even if after a day or 2 the share becomes completely profitable.

Of course this means that If the applicable stock looses (say) £50 for 3 days and then gains £200 one has only made £50 (3X -£50 +£200). However it seems that CMC Markets do not actually close their rolling daily bet for settlement each day but charge an interest payment which would suit me better. Of course I could have a quarterly bet but don't always want to pay the margin for such a period. Do you have any experience with this?

Ok I could bet on the nearest quarter but this is a more expensive way for a bet that may only last a few days, and I don't find it simple with a price and spread so far away from the market. Today I looked at the prices for rolling daily and September and there was a difference of over 10 points.

A: The real choice is between daily bets that settle daily and which you might forget to place or you may not place at the earliest opportunity and daily bets which your account automatically replaces every day because you have that flag set.

With CMC Markets, I can however confirm that their rolling bets do not close on a daily basis but remain open until you close the position manually, or the position is closed by the triggering of a closing order. Same goes for ODL Markets and Capital Spreads. This does give you give you a truer representation of your profit and loss as your entry level never changes. There is still, however, a financing charge for holding your long rolling positions (credit for short positions) overnight. This is debited or credited to your account immediately and is separate from the P&L of your open bet (but is more transparent as you can see the physical finance posting as opposed to it being incorporated in the daily closing of your position at a company who's policy is to close and re-open).

Q. What are the advantages and disadvantages between using Daily in relation longer contract trading?

A: When trading the FTSE index on a daily basis you need to be fairly sure of your expectancies of how the markets will trade. This is not to say you shouldn't trade daily, as mentioned earlier, you can make large profits very quickly - usually within a matter of hours and can close a trade straightaway if the markets are not going the way you expected. With longer contracts you don't have to be correct straight away. You may expect the markets to rise within the next few weeks and so go long on the FTSE. Soon after you've bought a contract the markets fall but you are not too concerned because the markets have another six weeks to turn around. Gradually share prices rise and eventually you are in profit. At the close of the contract you made a good profit although earlier in the contract's life you were showing a loss.

Consider this example : Imagine that a quote for September FTSE is 5280-5290. You buy at £20 per point at 5290. Within days share prices fall and the FTSE stands at 5170 showing a loss of £2,400. Gradually share prices rise and in late August the FTSE stands at 5322. At the end of the contract's life the FTSE is at 5407 and you end up with a profit of : 5407-5290 = 117. 117x £20 makes a profit of £2,340.00. Your profit is £2,340.00 even though you were, at one point, showing a loss of £2,400!

Tip: On a rule of thumb, if the share you bought rose/fell 20% the day after you have bought it, you may wish to sell it, so the nearest date should have the smallest spread. If the farthest date spread is not too far away from the nearest date spread trade that.

Q. Is there a quick way to work out if it's better value to open a daily spread bet or a forward spreadbet on, say, a liquid FTSE share...?

on, say , a liquid FTSE share with a narrow spread with the intention of closing it in a week or two?

A: There is no quick calculation.

The Futures Price = Cash Price + Carry Cost - Dividend payments in the period.

Carry cost = LIBOR + x% where x% is up to your broker. Because LIBOR fluctuates and the broker markup varies it prohibits a quick calculation. Bear in mind also that the cash price includes the broker's additional spread.

If a large dividend is due soon and it is greater than the carry cost then the futures price can actually be lower than the cash price. That's also why you will sometimes see for example the March future same or lower than the DEC.

It is also worth noting that with the current low cost of borrowing futures are very cheap. It's true that if you close a spread bet early you have paid for something you have not used but I think it's worth it simply to have a rolling profit/loss as the last column on the Open Orders window instead of a daily profit/loss. I find it comforting and confidence building to open my IG account and instantly see the majority of positions blue in the last column. It also means that I can instantly see if an initial position goes red and hits my maximum £X loss limit so that I can immediately ditch it.

 ...Continues here - FTSE 250, FTSE 100 Tracker and how Dividends are accounted for

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