Using Spread Bets to hold out Longer Term Positions

Q. Can I use spread bets to hold out longer term positions?


A: Yes! Today, a lot of the rage seems to focus on everyone trying to trade every move in the market. But with spread betting because of the higher costs involved in short term trading it's often a better stratagem to focus on trading longer term moves.

When looking on the medium to long term the costs become somewhat irrelevant, also it's often less hard to latch on to longer term moves and trends than catch all the short term ups and downs. And thirdly, you don't have to waste time following the market all the time. The author for example once held a Gold position using spread bets for over a year. Take the FTSE for instance, the index has only moved 0.04% a day on average since inception - this means that you stand a greater chance of a gain if you hold the Footsie for a longer period, in fact the chance of the FTSE gaining points over a month is 60% greater than if you just hold onto it for a day.

Another point worth noting is that many day traders struggle to make money over time, because they overtrade and the cost of entering and exiting new positions eats into their positions with time. Longer term trading comes with less pressure and is far easier to be successful in. To summarize when spread betting over the longer term rollover costs become somewhat irrelevant because they are few and far between although unfortunately unavoidable. However, never rollover future contracts yourself as it's cheaper if you call them and ask them to roll it over for you as they grant a small discount for this.

Q. If I were to hold a £20,000 Vodafone spread bet position for a year in the form of future contracts how much would this approximately cost me?

A: I suppose you are referring to the scenario where you rolling a Vodafone future from one quarter to the next. In this case I can only give you an approximation as different spread betting providers have different terms and conditions as regards closing and re-opening of future bets. If you were to spread bet £20,000 per point on Vodafone on a quarterly contract, you would be charged your stake X the spread in points to enter the trade, followed by 1/2 the spread X the stake for every three months thereafter.

Q. If I were to hold the same £20,000 Vodafone spread bet position for a year in the form of rolling daily contracts how much would this approximately cost me for the whole year?

A: Again, I suppose you are referring to the scenario where you rolling a Vodafone daily fron one day to the next. If you were to spread bet £20,000 per point on vodafone on a rolling contract, you would be charged according to the following equation -:

Overnight Charge = (p * s * (r + 2.5%)) / 365

p = current mid-price of vodafone

r = applicable interest rate (uk interest rate 30 day LIBOR)

s = client stake per point in £

This varies slightly every night obviously, dependant on where the price of vodafone closes, and also (but less importantly) daily fluctuation in the interest rate.

In practice if you hold a £20,000 position in Vodafone for a year it will cost you approximately £600; i.e. at 3% (roughly 2% over estimated Libor rate for the next 12 months which is roughly 1%). The only other thing you need to bear in mind is that some spread betting companies would calculate the moving average of the stock for the year. If for example the average price of Vodafone for the year was 10% higher than the level you bought the stock or 10% lower, then the funding would alter by approximately 10%. On the upside funding would be £660 but if the stock drops on average by 10% then funding would be approximately £540.

Q. Also, if I hold shares in Vodafone I get twice-yearly cash dividend payments from the company...

Will I get these cash dividends with a spread betting rolling daily?

A: With regard to dividends, your account is adjusted to keep it at a net zero position. Hence, on the EX-div date, the price will naturally drop to reflect the outgoing of the dividend payment. Since your position will lose money, your account will be credited with the appropriate amount. You will receive 80% of the dividends if you are long (20% will be tax withheld)

Q. I think long term is difficult with spread betting. Certainly gold and silver are fairly limited to about 3 months out, currencies 6 months and indices/stocks max one year...

A: This is true, but you can set up any of these to rollover automatically on expiry. Of course, that means you incur the cost of the spread again on each rollover, so you would need to be aware of that cost and take it into account in your investment decision. This is one reason some people favour CFDs which have no expiry date.

That said, CFDs can have their own issues. In 2008 (year) there has been a lot of controversy about CFD clients being forced to deposit extra cash to reduce their leverage from, say, 90% to 80% at very short notice or have their positions closed at a hefty loss, only to see the underlying market recover. I'd say they felt pretty suckered too!

A spreadbetters lament follows. A lot of the early spread betting companies have cleaned up their acts, and are proportionately better than they were. But are they simply getting more sophisticated?
I would never trust a bookie, full stop.
But you use their systems/software, you play by their rules.
They can be beaten... Quite easily. But most of the gripers are losing short-term traders. I know... I was one. I would blame every single thing on them. They even put a little man inside my machine! Fifing up every single trade I put on. Honest Guv! I swear he was there. I could feel him there... Then I beat him.
You want to know how? I shot the flucking little clunt!
Move out to a longer time frame for his holiness' time sake. You can 'scalp' on an hour chart you know!

Q. If I sell the shares I hold and put most of the proceeds into my offset mortgage account reopening spread bets for the same number of shares with the balance, am I in a better position?

Is having an open spread bet the same as holding a certificate other than not having ownership of the company? I tend to LTBH (i.e. buy long term and hold), is that suitable for a spread bet?

If the only difference between spread bets and holding shares is physical ownership of the company and assets then the tax advantages and not paying interest on that proportion of the mortgage loan seem to suggest that I would be best off not holding the shares and taking out the spread bets.

Have I got this right or does it not work like that?

A: Almost certainly not. The interest you pay on the spreadbet is likely to be more than that you pay on the mortgage. You'd have to check the figures carefully but I think it's likely that that's what you'd find if you did the sums.

If you were confident the use of spreadbets would work as follows using random numbers. You sell £50,000 shares and open £1,000pp FWY at 100p. This is an exposure of £100,000 and will cost you £25,000 with IG to open and you can put the other £25,000 into your offset mortgage (although you made need it for margin calls if FWY falls).

If FWY makes 30% over the next year you would have made £15,000 with your original shares. Through the spreadbet you make £30,000-£8,000(IG costs/finance) + £1,500 (offset mortgage interest at 6%) or £23,500 tax-free (i.e. 57% more, but on double the exposure). If you make the gain in a shorter time period the benefit rises due to lower IG finance costs.

However, if FWY loses 30% over the year you would have lost £15,000 with your original shares, but the spreadbet will probably lose you around £36,500.

Therefore, downside is worse than the upside because either way you have to pay the IG finance charge, so you need to be very confident in the upside for it to be worthwhile.

If you had done a spreadbet with the same exposure (i.e. £50,000), the spreadbet gain or loss (for +/- 30%) would be a profit of c.£13,250 or a loss of c.£16,750.

The above is an illustration of why most people lose on spreadbets, namely you need c.8% p.a. gain just to break even. The interest on the spread bet may not be obvious but if you study the detailed terms, you'll find it. Can be as much as LIBOR+3% (i.e. >7% pa). Once you study those details, they'll answer your other questions...

One other thing to bear in mind, though, which does argue for SBs: if you think you may have a CGT liability (i.e. expect to make trading profits > £8K-ish in any one year) then spread betting can be quite attractive, esp. if you are a higher rate tax payer.

Unfortunately 'there's no such thing as a free lunch'. Margin trading is not a way of getting free money!

 ...Continues here - Using Spread Betting for Hedging Purposes

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