This bets usually expire on a quarterly basis i.e. March, June, September and December. Generally, the pricing of the spread bet is based on the underlying futures prices, which will rarely be the same as the spot price because of the cost of carry.
This are straightforward. They are usually based on cash market and usually expire at the end of the day.
This is also quite straightforward as well. It rolls over to the next business day instead of closing out at the end of the day.
When trading futures, you can choose near, next and far futures contracts. This is betting on the outcome of the share (or other asset) price at the end of the next quarter, the second quarter and third quarter from when you placed our trade. Futures are long-term bets and it could take months to reap the rewards. The spreads will get wider the bigger the contract. Imagine if you had placed a far future bet on gold before the recession!
A confusingly titled market you may see is a daily future. A daily future uses the futures price, but the contract ends at the end of the day. You will have the option to roll the trade as with a regular daily trade.
On both of these you can close out early, although as the spreads are larger on a futures trade it will cost you a bit more to do so!
Different trading 'contracts' or 'futures' are offered by the spread trading company. The London Stock Exchange trades on quarterly periods of March, June, September and December with contracts expiring around the third Friday of those months. The exact expiry date for each trade will be available within the trading company's Internet site.
If you are actively trading, this date is often academic because you are highly likely to close your position before it expires. However, you do need to be aware of the approximate date because you do not want to enter a contract on the 18th March if it expires on the 21st March and you anticipate that your trade will last more than two or three days. Under these circumstances you would go for the June contract to give you three months in which to close your trade.
If you do leave a trade to run until the expiry date it will close automatically at the mid price of the spread. For example, if the price at expiry is 264 - 268, it will close at 266. This saves you half the spread but trading is more about operating a strategy, which will tell you when to close the trade, rather than waiting for the trade to expire. So almost every trade will be closed by you rather than run to expiry.
You will also notice that the spread will narrow slightly as the expiry date nears.
Occasionally, you may want your trade to continue beyond the contract expiry date. This is actually impossible but what the trading company will do is 'roll over' the trade if you request it. What happens in practice is that they close the trade on the expiry date at the mid price and simultaneously open another identical trade for the next trading quarter.
So when your position is closed you will realise your profit or loss (credited or debited to your account) and the position is then opened for you ready for the next period. Your new position will have a zero opening balance until it goes into profit or loss. This saves you physically closing a position and opening a new one and saves you some of the spread. Exactly how much spread you save will depend on the individual trade. The trading company will give you exact details before you decide to roll over and usually notify you of your option to roll over just before the expiry date.
Check with your trading company what will happen if you do nothing. Normally, companies will simply let your position expire (close) and if you decide to roll over, you will need to phone the trading company and request the roll over but some companies allow you to opt for automatic roll over unless you choose to close. If you do roll over to the next quarter you MUST check your stops because they are likely to be cancelled. You will need to re-set them with the new price in mind.
Rolling spreads work slightly different to quarterly contracts in that the spread trading company closes the position at the end of each trading day at the mid price and then opens it (rolls it over) at the mid price for you ready for the next day. So each day you will crystallise your profit or loss for that day and you start the next day with the position at zero. The position never actually expires until you decide to close it.
The benefit of a rolling position is that the spread can be appreciably smaller as you can see from the above example. However, your account is charged a small amount each day as a rolling fee. The rolling fee is based on interest rates and position size (see your trading company's terms and conditions for details).
I suggest that using rolling spreads is a good idea if they are available to you because of the tighter spreads if you anticipate your trade lasting days or a few weeks rather than months.
Daily spreads are slightly different to rolling spreads and generally only apply to Indices. A daily spread trade will expire at the market close of that day and will expire at the mid price. Again, you do not have to wait until the position expires, you can close it at any time during the day. The advantage is a smaller spread so this would be the choice for a day trader who expects a trade to last minutes to hours rather than days. He or she will almost certainly close all trades by the end of the day in any case. A typical Daily spread for the Dow Jones Index might be 4 or 6 where the quarterly spread might be 10.
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