Spread Betting on Cotton
Cotton is known as a soft commodity, a term applies to most things that are grown and sold on the futures market. The other general categories are metals, which include precious metals such as gold and industrial metals such as copper, and energy, embracing oil, gas, etc. Soft commodities are more prone to outside influences such as changing weather patterns affecting their prices, which makes them volatile and interesting to trade.
For our purposes, the commodity market is the same as the futures market, and is the trading market where contracts are made for supply and demand for goods at a certain date in the future. Many of the goods offered on the futures market are priced in US dollars, and an example of this is cotton, which is called NY cotton by spread betting broker IG Index, and currently priced at 9141.5 – 9172.5. The number is actually cents with two decimal places per pound, that is around $.91 per pound, and a full futures contract is for 50,000 pounds of cotton to the specification given.
When you are spread trading on commodities, you will often find that there is a time when spreadbets are not taken. This is because the futures contracts finish on set dates, sometimes quarterly and sometimes more frequently, and spread betting is closed before the due dates. This sometimes makes the charts look as though there have been big jumps in price, where is in fact it is simply that some dates are missing.
The advantage of spread betting on futures is that you can benefit from the volatility of your chosen commodity without having the full risk of holding a futures contract. You can set, in your local currency, how much you are betting on the change in price, and this can mean much less risk than being a futures trader. However, whenever you are financial spread betting you need to have a trading plan that will help you to minimize your losses if the market turns against you.
One factor which is not always appreciated when spread betting on futures is that because many are priced in US dollars, they can be affected by what happens to the exchange rate. For example, a great deal of cotton is grown in India. If the dollar was to strengthen against the rupee, then less dollars would be required to pay a certain number of rupees to the grower, and the futures contract could come down in price.
Another factor would be a change in the interest rate offered in the US, which would be announced by the Federal Reserve Board. Depending which way this is, it would weaken or strengthen the dollar, and a weaker dollar would tend to increase the price of commodities traded in the US dollar.
If you want to spread bet on cotton futures, then you must be prepared to do your homework, researching into seasonal and weather factors and other influences on the price so that you enter your bet with the best possible information.
How to Spreadbet on Cotton
Spread betting on cotton is easy to do, and much simpler than becoming directly involved in the futures markets to trade on the same thing. You also have the advantage that you can name your own price when spread betting, and are not limited to the size of contract on offer. The current price on cotton with IG Index is 9099.5 – 9129.5. If you think that the price of cotton is going up, you could place a long bet on this at say £3.50 per point.
Cotton can move hundreds of points in a week, so it is no surprise to you if the price goes up to 9756.2 – 9786.2, and you decide to close your bet and collect your winnings. This is how you work out how much you have won: –
- Your long spread bet was placed at 9129.5.
- Your bet closed at 9756.2.
- That means you won 9756.2 less 9129.5 points.
- That totals 626.7 points.
- Your spreadbet was for £3.50 per point.
- Therefore you won £2193.45.
Things do not always work out, and perhaps the price might have gone down after you placed your bet. Suppose it went down to 9002.5 – 9032.5, and you decided to close your bet and accept your losses. This is how much you lost: –
- Your long spread betting trade was placed at 9129.5.
- Your spreadbet closed at 9002.5.
- That means you lost 9129.5 less 9002.5 points.
- That totals 127 points.
- Your bet was for £3.50 per point.
- Therefore you lost a total of £444.50.
With the volatility in cotton, you might have decided from your analysis that the price would go down not up, and taking out a short bet in the first place at the price of 9099.5. Perhaps you wagered £2.50 per point. Say the price went down to 8567.9 – 8597.9, and you closed your short bet and calculated your winnings: –
- Your short or sell spreadbet was placed at 9099.5.
- It closed at the buying price of 8597.9.
- So you gained 9099.5 less 8597.9 points.
- That works out to 501.6 points.
- This time you bet £2.50 per point.
- That means you gained 501.6 times £2.50.
- Your total winnings are £1254.
One of the principles that you must learn when spread betting is to close your bet and accept your losses quickly, before they become too great. The difference between losing and profiting overall depends on you keeping your losses small and making the most you can out of your gains. Say the price went up to 9153.6 – 9183.6, you might decide to close your bet to minimize the cost to you.
- Your short or sell bet was placed at 9099.5.
- It closed at the buying price of 9183.6.
- So you lost 9183.6 less 9099.5 points.
- That works out to 84.1 points.
- This time you bet £2.50 per point.
- That means you lost 84.1 times £2.50.
- Your total loss was £210.25.
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