Fixed Odds and Silver Shorts
There are many ways to trade financial markets, and, while spread betting is my preferred trading vehicle, there are some situations in which this may not be the most appropriate vehicle.
For example, if you wanted to take a ‘small’ punt on the gold price falling, you might find it prohibitively expensive to do so within your very strict money management criteria unless you employed a very tight stop (with a high chance of stopping out) or were fortunate enough to be operating via a spread betting account that allowed fractional bets of less than £1-per-point.
It wouldn’t matter that your bearish judgement was proved right in the end, if the trade went too far against you in the meantime.
Although I’m not a big fan of financial ‘options’ that have to fall on the right side of a particular price at a particular date, they do have a place in allowing you to profit by being right in the end (i.e. at the expiry date) no matter how far the trade goes against you in the meantime. On regular stockbroker platforms your options for trading options may be limited to a small set of ‘covered warrants’ with unfavourable strike prices and expiry dates. When it comes to shorting silver — which is the theme of my upcoming example — you might not find one at all.
There is an alternative, in the form of…
Fixed Odds Bets
Some of the big-name betting companies like Ladbrokes and William Hill allow you to ‘day trade’ stock indices, currencies and commodities using short-term fixed-odds binary bets, but what I’m thinking about is the longer-term fixed odds bets that you can trade (for example) at Betonmarkets.
This platform allows you to choose your own strike price (which may be the current price) and your own expiry date of up to a year. So if I had thought early in the year that gold, silver and other commodities were heading for a crash during the subsequent year — but that anything could happen in the meantime — then I might have placed a series of fixed odds bets in preference to spread bets. And I did.
I placed a series of bets at various prices so as to create a series of possible pay-offs, and as an example here is one of them:
On 2 May it cost me £47.41 to place a fixed odds bet that will pay out £80 if the price of silver is less than the entry price (of 44.5852) on 26 May 2012. This is a return, if my judgement proves correct, of almost 69% within one year. Or, I’ll lose my initial stake.
You high rollers out there can scale up the actual amounts, but do keep in mind that this is one of many such bets.
Everything in the Fixed Odds Garden is Not Rosy
It’s ironic that in this case a spread bet would have served me just as well, because this particular trade has never gone against me, and by now I could have trailed a stop order to lock in some of the profit.
Theoretically I could cash-in the bet right now for the current value (at the time of writing) of £71.83, but the fixed odds platform won’t let me. Funny, that.
Tony Loton is a private trader, and author of the book ‘Position Trading’ published by LOTONtech.