How to Spread Bet the FTSE 250
The FTSE 250 is one of the better known stock indices, and is based on the 250 companies that are listed on the London Stock Exchange after the first 100. (The first 100 form the FTSE 100 index). The FTSE 250 only accounts for about 15% of the value of the stock market, but that is because the FTSE 100 companies cover the first 81% of the market capitalization. There is a third index called the FTSE 350 which is just the combination of the FTSE 100 and the FTSE 250, and there are other FTSE indices for market sectors and all shares.
The FTSE indices are based on market capitalization, which basically means the companies with the largest values, and they are reviewed every quarter to promote/demote the different businesses between the indices. As such the FTSE 250 is referred to as a capitalisation-weighted index. Only the top ten companies in the 250 have more than a one percent effect on the index, so it is very diverse and not dependent on particular brands. It is interesting to noted that the FTSE 250 has fared better than the FTSE 100 in 9 of the past 12 years. However, one has to be careful as the FTSE 250 index isn’t immune from the the macroeconomic events that continue to batter markets.
Dominating industries in the index include support services, leisure, real estate, travel as well as financial services. It is also worth noting that the FTSE 250 also includes a good number of investment trusts which are basically investment funds which issue securities on the stock market. These work like mutual funds but people invest into them by buying shares. For instance, J.P.Morgan alone has some 6 of its investment trusts included in the FTSE 350.
The market capitalisation of the FTSE 250 was £232.8 billion as of 30 April 2012. The average market capitalisation of a FTSE 250 constituent is £916m. Of course, there are a greater number of companies to choose from in the mid-cap index and yet the FTSE 250 is more concentrated than the FTSE 100 in terms of sector weightings. The largest sector is currently Financials with a 30.9% weighting, followed by Industrials with 22.3%, and Consumer Services making up 16.1% of the index.
It is often said that the FTSE 250 is a better barometer of how the UK economy is faring as opposed to the FTSE 100 since the latter includes many multi-national companies whose earnings originate from outside the UK. As such if you wish to place a bet on the UK economy, the FTSE 250 might be a better bet (excuse the pun!). Longer term growth of the FTSE 250 index has in quite a few years surpassed that experienced by its blue chip sister index. It is also worth noting that the FTSE 250 includes companies that are still growing and as such offers prospects for bigger growth compared to its more popular counterpart.
FTSE 250 Trading Trends
Politics – and in particular how the sovereign debt crisis is tackled – will have a massive impact on mid cap trading. The index is known as the best indicator of how UK companies are performing, compared with the FTSE 100 index, which has a number of internationally-focused constituents.
What you do have to realize, though, if you’re used to spread betting on the FTSE 100, is that the FTSE 250 is still very volatile, and can change rapidly, although not necessarily on the same time frame as the UK100. Obviously, this could be good or bad for you, depending on how much risk you want to take. Volatility always equates to opportunity but you need to be on the right side of the equation.
Because the FTSE 250 is still one of the better known and traded indices, you will find that many providers will be quoting. The rolling daily spreadbet typically has a spread of about 20 points, and the futures based bets may go up to about 70 points spread, reflecting the uncertainty. Futures generally are set to expire every quarter. Of course, the rolling daily bet is not necessarily any cheaper overall, because there will be a small financing charge applied each night that the bet is rolled over. This does not amount to much if you are betting over a period of days or a week or two, but would add up over a month or two.
When it comes to setting the stop losses, the volatility of the index may make you think twice. If you were to set your stop perhaps 40 points away from the entry then you could easily be taken out of the bet by a minor spike even if your bet was a good one. But on the other hand, if your stop loss is 100 points away then you risk losing a greater amount should the index keep on moving against you. One way that you can try to deal with this is by setting a long stop, but watch the index closely and be prepared to exit before the stop is reached if the price is not moving as you had anticipated.
So when you are spread trading the FTSE 250, you may need to limit your bets to keep your risks down to an acceptable level, and the basic rules of spread betting apply, particularly the one that says you should cut your losses quickly if it is going against you.
FTSE 250 Spread Betting
You will be forgiven for thinking that all spread betting firms are created equal. For instance IG offers the FTSE 250 rolling contract while Ayondo only quote the FTSE 250 future contract. However, IG’s spreads and terms of business won’t (usually) be the best. Ayondo don’t quote the FTSE 250 rolling daily as it is not sufficiently liquid. Taking a look, IG’s rolling contract has a spread of 32 but this is variable which tend to get wider during key data announcements. Ayondo on the other hand have fixed spreads (tighter than IG!) and will only charge you financing on the actual amount you borrow from them as opposed to the full market exposure. For instance, IG’s futures price is currently 100 points compared to 40 on Ayondo. Also, Ayondo have a policy where for 6 extra points you can hold the position till expiry which works much cheaper than holding a rolling daily in the long term.
Even for the FTSE 250 some providers may have an online limit but by calling in they should be able to meet your requirements and will no doubt be more than happy to have your business. Margin varies, but is usually anything from 10-30%. For the 250 it will be low as it is so liquid.
If you want to spread bet on the FTSE 250 you first have to realize that it is fairly volatile, and you should be careful when starting out to limit your exposure. This index is also called the FTSE Mid 250 with the spread betting company IG Index, where its current pricing is 10,302 sell, 10,323 buy for a daily rolling bet.
You might think that the FTSE 250 was going up over the next few days, and therefore place a buy bet for £4 at 10,323. Say that the index goes up to 10,521 – 10,542, and you decide to take your winnings. As you sell to close your bet, this is at a price of 10,521.
This is the way to work out how much you have made: –
- The number of points that you have gained is 10,521-10,323
- the total number of points gained is 198
- your bet was for £4 per point
- therefore your winnings are £4 times 198
- you made a total of £792
The index might also have gone down, losing you money, and say for instance that you had placed a stop loss order when you took out the bet at a level of 10,250. The index drops far enough that this stop loss order becomes active, and your bet closes at 10,245. This is less than 10,250, but the index was falling quickly when the stop loss order was triggered and became a market order to sell, and that price is the result of the market order.
This time you need to work out how much you lost: –
- the number of points that you lost is 10,323 -10,245
- the total number of points lost is 78
- your bet was for £4 per point
- you calculate your loss as £4 times 78
- your total loss is £312
The price quoted by IG index for a futures style bet, expiring in two months time, is 10,311 – 10,373. The spread between the two prices is greater than the rolling daily bet as it includes financing costs which are charged daily with the immediate bet. Taking a longer view, you decide that the index will be falling and place a sell bet at 10,311 for £7.
The index drops to 10,156 – 10,218, and you decide to close the bet, which you can do at the buy price of 10,218.
You have won the following amount –
Number of points equals 10,311-10,218 which is 93.
Bet size equals £7 per point.
Size of win equals 93 times £7 which is £651.
Again, it could be that the bet went against you, and that you decide to close the bet for a loss. Say you did this when the quote was 10,350 – 10,412. The price you close at is higher one, as you always pay the spread.
To calculate your losses, you note that the point difference is 10,412-10,311, which is 101. As you bet £7 per point, your total loss is £707.
Using the UK 250 as a Hedge against Individual Shares
It is worth noting that you can also use FTSE 250 index trade to setup a hedge against a shares portfolio. You can do this by opening a short position on the FTSE 250 index, although here you have to be careful as the FTSE 250 may not be an exact hedge against a number of its constituents making up the index. Other things you have to consider are weightings on indices, margin requirements and cost of financing.
To conclude, while the global uncertainty makes stand out predictions tricky, those willing to take a closer look at the index and underlying specifics may well find there are opportunities to take advantage of.
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