Daily Index Bets vs Monthly Contracts

Rolling Daily Example

You have logged into your spread betting account and you have decided that you think stocks in the UK are over-valued. So you put in a sell order on the UK 100.

There are various options available to you depending on the length of time the spread trade is to be kept open. You can choose between a short-term daily bet, to take a position on the immediate market direction across a whole market, or longer-term bets to gain exposure to a market over a longer period of time.

In this example we will assume you have taken a bet on the September quarterly future.

The provider’s price on the UK 100 September 10 future is 5347 – 5352, the client sells £1 per point at 5347. For every one point movement in the September future price you will win or lose £1. The margin requirement for this trade is 40 time your stake. £1 x 40 = £40.

One week later the market has risen to 5385 – 5390 leading you to buy back £1 per point at 5390. The loss on the trade is 5347 – 5390 = (43) x £1 per point = (£43). If the market had fallen you would have made a profit.

Rollover Explained

A rollover is a charge for holding the position overnight and is charged in point terms. For example, in the UK 100 rolling future we charge 1 point to rollover the position. Calculated and 1 point times your stake.

Daily Index Bets (aka as Futures or Daily Trades/Daily Cash Bets)

1. The Daily Futures can only be kept open for one day (unless you open a Rolling Daily).
2. Daily Futures (aka as daily trades) have the smallest spread but expire at the end of the trading session (i.e. have a lifetime of one trading day).
3. Daily bets are best suited for shorter term trades as the spreads are usually quite tight (for instance Capital Spreads offers spreads on the Daily FTSE/DAX for just 1pt) and contracts can be rolled from one day to the next.
4. Note that the Rolling Daily market may not be 100% in line with the Cash market. Cash indices tend to lag behind slightly, particularly when trading is beginning for the day, as they are simply a reflection of the prices of the components of which they consist – if half of the components of the Dow Jones have not traded ten minutes after the opening of the trading day, the index is unlikely to reflect the true current situation. The futures will give a far better picture in such a scenario, and for this reason, we use a variety of sources in order to price our Daily Index bets.
5. FTSE – market is quoted 24 hours a day, but the official quote is from 8.00 am right up to the close 4.30 pm. If you allow the spread bet to expire, i.e. hold the position until 4.30 pm for the daily FTSE, or 9.00pm for the Daily Dow you do not pay any spread, the deal is settled at the exact closing price down to the decimal point.
6. When trading daily futures make sure to take account of the time differences – being in the UK trading the FTSE wouldn’t be a problem and I can trade the Dow as it opens mid-afternoon and closes at night, but trading the Nikkei on a daily basis is difficult due to the great time difference between the UK and Japan.
7. Those in the know often advise people new to the market to avoid daily bets in the indices, simply because it is difficult for private traders to beat the professionals at their own game. It is a generally accepted view that taking a longer term view increases your chances of making money from your initial bet (although this strategy tends to increase traders’ costs).
8. Rolling cash bets are an extension of the daily cash bet – this is a cash bet that is carried over from one day to the next for as long as the spread better wants subject to paying the financing costs associated with it.
9. Initial margin works by multiplying the Notional Trading Requirement basis (deposit factor) by the size of the stake. So if the notional trading requirement for the FTSE is 100 you would need £100 to open a bet on the FTSE.

Monthly Quarterly Index Contracts

1. If you intend to hold a position for more than 3 weeks it will work out cheaper to take a quarterly stock index future.
2. Futures contracts are priced from the futures market with the spread betting firm wrapping their spread around the value of the underlying contract.
3. Contract Expiries
4. FTSE 100 Future LIFFE London – March, June, September, December
   Expires the 3rd of February of the contract month, so for December it would be the 3rd Friday in December.
5. Dow Jones Index Future CBOT- Chicago – March, June, September, December
   Expires the 3rd of February of the contract month, so for December it would be the 3rd Friday in December.
6. It’s very important to understand that betting on a futures contract is not the same as betting on the underlying market, though the two are obviously linked.
7. All major indices quoted by a spread betting firm have a Futures market related to them (i.e. the FTSE 100 has the LIFFE FTSE Futures market). A futures contract, a spread bet on it, will often stand at a premium to the cash market, and the longer the life of the contract, the greater the premium is likely to be. The yield on shares is lower than the interest paid on bank deposits. So an investor would, if the futures price were the same as the cash price, get a higher return by buying futures on margin, and then banking the rest of his cash, than he would if he simply used all of his money to buy shares. The premium cancels out this effect. It also takes into account of the fact that someone trading futures receives no dividend. So don’t consider this premium as some kind of market prediction that share prices will rise – it is simply a mechanical adjustment to today’s share prices. This Adjustment is called the ‘Fair Value’.
8. The FTSE 100 index, for example, has a hundred separate components and will move up or down more slowly than the futures contract, which is a single market that can factor in developments more quickly.
9. Speculative money, and all the excesses that go with it, drive futures markets so the prices can be much more volatile than those in the underlying market.
10. The Futures market is a market like any other, driven by supply and demand and a contract will often trade at a premium several points above or below the fair-value level.
11. As I have already stated each market has various contract months, i.e. March, June, September, December etc. These months and expiry dates are not the same for all markets.
12. If you have rollover instructions in place with your spread betting firm, contracts will be automatically rolled over from one contract month when it expires into the next contract month. They will also automatically change your stop loss so that it is the same distance from the market as it was on the previous contract so you do not need to worry about this.
13. A few index bets are not based directly on any futures contract, the daily FTSE and Wall Street markets being cases in point.
14. Generally it is more expensive to bet when the underlying market is closed. For example, the quarterly FTSE 100 futures spread may increase from 8 points to 10 points after 4.30pm. Outside of normal market hours, a spread betting company acts more like a bookmaker, essentially making up the stock index futures prices based on what the US markets are doing and the business on their books. Those who trade at such times must inevitably take on board a certain level of risk.
15. Just because you hold a December contract does not mean that you have to wait until December to close your bet, you can close it out at any time, say in the first week of December. It is also a good idea not to run the contract right up until the last day as very large swings can occur as large futures players close out their trades. This is known as triple witching and the effect starts the last few days before the contract expires.
16. Futures based bets are a logical choice for most investors intent on using spread betting to boost their return and/or for hedging purposes. You do not have the time pressure that a daily cash bet entails. Provided you have a bit of nerve and enough leeway in your account, you can stand a short-term loss if you are convinced your judgement is correct.

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