A spread betting example
The best way to explain the key components of a spread bet is through a worked example.
It’s the 4th Feb and the UK 100 June is trading at 6712. The official contract expiration is 20th June (please see market information sheets for market expiration).
The spread betting provider is quoting a two way price in UK 100 June:
UK 100 June SELL 6710 – 6714 BUY
You have two options:
Option 1:
You think the market will rise and BUY £10 per point at 6714.
Option 2:
You think the market will fall and SELL £10 per point at 6710.
Notes:
The UK 100 Index is based on the top 100 capitalised stocks in the UK.
You have chosen the contract expiry to be June. Contract terms state that if you hold a position at 10am on the 20th of June will automatically settle your bet at the official settlement price calculated by the underlying exchange.
UK 100 has a bet per of 1, therefore if you buy at 6714 and the market goes up to 6715, this is your per point movement.
Outcome of Option 1:
You were correct to BUY – the market did indeed rise. Your profit is the difference between the opening price and the closing price multiplied by your stake.
Opening Level 6714
Closing Level 6900
Difference 186
You bet £10 per point
PROFIT: 186 x £10 per point = £1860
Outcome of Option 2:
Your view to SELL was incorrect.
Your loss is calculated as the difference between the price you sold at and the price you bought at multiplied by your stake.
Opening Level 6710
Closing Level 6900
Difference -190
You bet £10 per point
LOSS: -190 x £10 per point = -£1900
How to close a position before expiration
The previous example is an illustration of a trade held to expiration. You are not obligated to leave a position to expiry; you can close the position at any time before the expiry date.
To close an open position you must trade out of that position by obtaining a new quote from the spread betting provider then trade an equal and opposite amount to your open position.
For example, if you bought £10 of UK 100 June, and wish to close the entire trade, you must sell £10 of UK 100 June.
If you do not wish to close a position you have the option to ‘roll’ the bet forward to the next contract period. In the case of the example above (UK 100 June) you would have the option to ‘roll’ this contract into the next available future month which would be September (or another month if available). This would entail selling the UK 100 June position while simultaneously buying a September position.
Conclusion
As you can see spread betting is quite simple to understand and with many benefits attached providing you do not over expose yourself to unnecessary risks.
At this stage learning the concept and terminology will help you get started on your journey to successful spread betting. Like with anything else, consistent practise along with the right education and tools one can become quite proficient to a certain degree.
In today’s markets it is essential to understand that there will be opportunities to capitalise in future price movements. However as the financial markets become increasingly dynamic and investors become more savvy, spread betting companies aim to help you improve your knowledge and skills to prepare you for future opportunities.
