Spread Betting Sirius Minerals
While mining and exploration companies are generally focused on other things, Sirius Minerals has been quietly developing in the potash market. Potash is an essential ingredient in fertilizer, and its price is set to grow steadily in the world’s attempt to keep up with agricultural production. Sirius has been effective in locating potash deposits, most recently in Yorkshire in the north of England in 2011, and this has resulted in an enlivened stock market interest in the company.
Sirius Minerals is quoted on the alternative market (AIM), a division of the London stock exchange which has less rigorous financial and reporting requirements, and is often the way that small publicly traded companies start on the stock market. Sirius is doing well, as although conventional mining companies are suffering from a lack of demand for industrial metals, this situation does not apply to potash. The price of food is increasing rapidly, and it is expected that farmers will be prepared to spend more on fertilizers such as potash to maximize their results.
Sirius also has properties in North America and Australia which it is exploring. In common with all mining and exploration companies, you can expect the price to jump around, responding favourably any time a report of new findings comes out.
This means that Sirius Minerals has some characteristics that make it a good prospect for spread betting. It trades relatively cheaply, at around 20 pence per share and is quite volatile since any significant findings can make a big impact on its stock price. In the last year alone, the share price has been over 33 pence per share, and less than 2 pence per share.
One of the problems with this, however, is that the changes in price often come following news. This is a notoriously difficult circumstance to trade. While it might seem obvious that you should buy as soon as you hear good news, and sell if the news is not as good as expected, the markets do not always work as straightforwardly as this. Other traders will tend to price the expected news into the share price before the announcement, so it is only unexpected announcements that can certainly move the price in a certain direction, and by definition (unless you include illegal insider trading) you cannot know that unexpected announcements are coming. Other than this, you may see prices fall when good news is announced, or rise on bad news, presumably because the news is not as bad as expected.
One of the ways in which the savvy spread better can counter this is to have a good trading plan, with a tight stop loss strategy. It seems counter intuitive to have a tight, or close, stop loss on a share price which is extremely volatile, but sometimes that may be the only way that you can preserve your capital. You always need to have in mind how much you can afford to lose without dramatically reducing your resources and restricting your ability to spread trade, and you must set realistic levels to close the losing trades and preserve your funds.
Trading Sirius Minerals
Sirius Minerals is one of the types of companies that have a volatile price, and can cause joy or grief to the unprepared trader. Mining and exploration companies are typical of this, and even though Sirius Minerals is in the market for potash, rather than industrial or precious metals, it has shown extensive volatility. The current price for a rolling daily bet is 20.948 – 21.053.
If you believe that the price will fall, then you may want to place a sell or short spreadbet on this security. Say you bet £15 per point for a drop in price below 20.948. If it works out, perhaps the price will go down to 15.635 – 15.740, and you can close the bet and collect your winnings.
As it was a short spread bet, it opens on the lower price of the quote, in this case 20.948, and it closes on the higher price of the second quote, or 15.740. That means that the number of points you gained is 20.948 less 15.740, which works out to 5.208. As you bet £15 per point, you have won £78.12 on this bet.
As this stock is volatile, it’s no surprise if instead it goes up and you are forced to close the bet to minimize your losses, say at a price of 21.536 – 21.641. To work out how much you lost, you simply work out the difference in points again. The bet was placed at 20.948, as before, and closed at 21.641. That works out to 0.693 points lost. With your chosen stake, you have lost £10.39.
As a second example of a spread bet on Sirius Minerals, let’s assume instead that you think it will go up. You would place a long bet for say £25 per point at the higher of the two original quoted numbers, 21.053. This time, let’s say it goes up to 26.459 – 26.564. You close the bet and work out your winnings.
The long bet went on at 21.053, and was closed at 26.459. The total points you have gained are 26.459-21.053, which is 5.406. Your bet this time was £25 per point, so multiplying this up gives you a total profit of £135.15.
You need to have a good plan in place to avoid any large losses. With a volatile stock like this one, you may even want to consider a guaranteed stop loss order which will allow you to close your losing bet at the price you want. With an ordinary stop loss order, when the price is reached a market order to close the bet is issued, and in the meantime the price may drop further, so you lose more than expected. The guaranteed stop loss order, as the name suggests, allows you to name the price that you will get if the bet loses, but it does cost more by having a larger spread, and you pay this whether or not your bet loses. So it’s your choice.
Say the price dropped to 19.653 – 19.742. If you close the bet at 19.653, you have lost 21.053-19.653 which is 1.4 points, so at £25 per point you lose £35.
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