Rolling Daily Bets and Panic Selling

Robbie Burns, aka The Naked Trader offers some words of wisdom this month…

There are many advantages to spreadbetting, but one of the best ones must remain bagging a quick profit with hardly any costs involved.

When a share puts out some kind of warning, these days the knee-jerk reaction is to overdo it on the downside.

So when a share should have been marked down say ten percent, sometimes that markdown can be 30%.

Why? Well, aswell as initial fear taking hold, of course all the stop loss orders get hit and tons of shares have to be unloaded onto the market because of that.

But that knee-jerk reaction is something that can be taken advantage of.

Using a rolling daily bet for a day pretty much costs nothing – over a few days still not much and in any event cheaper than paying typical commission and stamp duty if the shares were purchased instead of a spreadbet – oh, and no tax on profits!

A recent example is APR – this was knocked down to the low 800s from 1100 – nearly 25% on delayed results, yet the figures looked OK, certainly not worth a 25% markdown, perhaps 10% maybe.

So a quick rolling spreadbet was used; in at around 850 for a tenner a point and lo and behold it soon rises back to a tenner! Half the spreadbet can then be sensibly cut and taken as profit, leaving the rest to run for a bit. Costs minimal, profits large!

Here’s a really good rule of thumb I am now using to judge whether a share price might rise after an initial overdone fall – make a note of the opening price.

In APR’s case it opened up on the day of the delayed results statement at about 950. This is interesting because this is what the market thinks is about the right price before the panic sellers come in and stops are activated flooding the market with shares etc. APR’shares duly went a lot lower into the mid 800s which was a perfect point to buy and the shares worked their way back up to 950 in a few days.

Another example is Supergroup – opened up at 415 after a profits warning. Then it sank down to the 320 area where it was easy to spot the turn and grab a rolling daily up bet. The hope here is it will shortly rise to the 400-415 area at which point profit can be taken again with minimal costs given tight rolling spreads, and the small overnight cost of carry.

If bets like these don’t work out and the shares sink further, of course it is best to get out with a small loss just in case.

Of course one has to judge the company concerned and check it’s not going bust! I would be a bit more careful about using this strategy perhaps with an oil company.

One way, once the share is going back up, of protecting the bet is simply to gradually raise any stop as the price starts to rise, though making sure to keep a decent distance away from the current price to avoid getting spiked out.

And one thing that a reader quite rightly pointed out to me recently and I mention in my books: when it comes to stop losses don’t forget ex dividend dates (usually Wednesdays).

Say your share has a 30p dividend due and so it opens up 30p lower, you really don’t want to be out of it just because of the dividend!

So a good lesson is – it is worth checking your stops and doing your homework on the dividend payments! And I reckon that for this edition, this is a good place to… stop!

See you next month.

Robbie

Article reproduced from the May edition of Spreadbet eMagazine