How to Spread Bet the S&P
Why spread bet on the S&P 500? Well for one it is less volatile than the Dow Jones. Even spread betting the S&P at £1pp you can have a stop say about 10 points (lose a tenner max – no problems) but potentially catch a bottom, or a wave, and grab circa 10 points profit over two trading sessions. It is also a more diversified index than the Dow Jones Industrial Average and gives a better picture of the overall health of the USA economy than its bigger Dow counterpart.
The S&P 500 versus the Nasdaq 100 by Alastair McCaig of IG Index
But what is the S&P 500 Index?
Standard and Poor’s is a financial company that functions as a ratings agency, but is chiefly known for producing the S&P 500, an index of 500 US companies. The index is just over a half century old, which is much younger than the established Dow Jones Industrial Average (DJIA), but it is still a major US index that some argue represents the US economy more completely because of its inclusion of so many companies, as opposed to the Dow’s 30 companies.
In actual fact, both of these indices give a good account of the US outlook, and pretty much move in lockstep as you can see from the following chart, with the Dow in blue and the S&P in black and red: –
The US markets are fairly volatile which is evident in the last year alone of this chart where the value of the Standard & Poor’s has varied between 1100 and 1400 (the Dow is scaled to fit, its actual value is of course well over 11,000).
As with the Dow, there are a number of events that you can watch for that will possibly impact the S&P 500. Market values are all about public confidence, and this is affected by Presidential pronouncements, Treasury Secretary speeches and the Federal Reserve Board (Feds) regular meetings.
The Federal Open Market Committee of the Feds meets around every six weeks, and the US markets speculate in advance whether or not they will change the Fed Funds rate, which acts as a bellwether for all other interest rates such as mortgage repayments and return on a U.S. Treasury bonds. As a general rule, an increase in interest rate is not good for the stock market because it makes consumers less likely to buy stocks and increases the cost of doing business. However, if the increase is expected then the impact may already be factored into share prices before the announcement.
Another event which tends to affect the market values is the US jobless claims figure, a weekly report on the number of people who have filed for unemployment benefits. While a large number generally depresses the market, in better times a small number can also be detrimental, as it could indicate that companies will find it hard to hire new workers and may have to pay existing workers more.
And while that deals with the number of people looking for jobs, the US non-farm payrolls figure is also significant, as it indicates the basic hourly wages for major industries and how many hours a week are worked. Again, this gives an excellent indication of the outlook for the US economy. These numbers impact directly on the ability of consumers to spend on companies’ products, and therefore their profitability. On the other hand, the non-farm payrolls will help to identify wage trends, which show the possibility of wage inflation; wage inflation can lead to a raising of the interest rates, resulting in a bearish move of the market.
Analysis of the S&P 500 Chart Movements [June 2013]
Spread Betting the S&P 500 Index
The S&P 500 is one of the US indices. S&P stands for Standard and Poor’s, which is also the ratings agency which downgraded the credit rating of the USA recently. The S&P includes 500 American companies in its index.
Looking at the spread betting company’s website, you might see a quote of 1191.67 – 1192.17 for this index, sometimes also called the US SPX 500. This means you can buy a bet at 1192.17 for the price to rise. Say you bet £10 per point that the market would rise. The spread might move to 1220.65 – 1221.15, at that time you decide to take your profit. You close your bet at 1220.65.
You can see how much you profited from the following calculation –
- the index went up from 1192.17 to 1220.65
- that’s an increase of 28.48
- your bet was £10 per point
- so your profit is 28.48 x £10
- for a total profit of £284.80
if instead you had chosen the wrong direction and the S&P dropped, you might choose to close your bet and limit your losses when the spread betting company was quoting 1175.26 – 1175.76. Then you could calculate how much you lost on this bet in the following way –
- The S&P 500 dropped from 1192.17 to 1175.26
- The loss is 16.91
- the total loss is 16.91 times £10
- which is £169.10
Perhaps over the long-term you decide that the S&P will fall, and you decide to take out a longer term bet for a drop in the index. The US SPX 500 is quoted by your spread betting provider at 1177.13 – 1178.13 for March 2012. There are two things to note here. Your spread betting company has also decided that the index will fall, by providing lower prices. And secondly, as is typical the spread offered is larger for a futures based bet.
You place a bet for £20 per point for a drop in value from a price of 1177.13. You don’t have to wait until March before making a profit. If you see that the price has changed to 1143.63 – 1144.63 a little while later, you can decide to close the bet then and make your money. You close the bet at 1144.63.
You can now figure out your profit like this –
- the number of points that the S&P has dropped is 1177.13-1144.63
- that gives you a gain of 32.5 points
- as the bet was for £20 per point, you gain 32.5 times £20 which is £650.
Suppose that the bet did not go your way, but you feared it was going to get worse and closed the bet when your spread betting provider was quoting 1187.24 – 1188.24. As you sold to open the bet, you buy to close the bet which is at the price of 1188.24.
Here’s how you find out your loss –
- the number of points it went up against you is 1188.24-1177.13
- that is equal to 11.11
- with a bet size of £20 per point, you have lost 11.11 times £20
- your total losses are £222.20
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