Spread Bet on Rolls-Royce Holdings Shares
Mention the name of Rolls-Royce (RR.), and many people will think of the motor car, of which the British were so rightly proud. But the Rolls-Royce company that is listed on the London Stock Exchange (RR.), and is the 28th largest on that market, is a multinational power systems company head-quartered in London, producing aircraft engines and serving the defence sector.
As you can see from this monthly price chart, despite the dip during the global economic crisis Rolls-Royce has gone from strength to strength in recent years. It is the world’s second-largest maker of aircraft engines, ceding the first place only to General Electric, and is also in the marine and energy sectors.
Rolls-Royce was originally founded in 1906 in Manchester, and entered the aircraft engine sector for the First World War, where around half the engines used by the Allies were fabricated by Rolls-Royce. The Rolls-Royce Merlin engine is perhaps the most famous aircraft engine, powering the Supermarine Spitfire, the De Havilland Mosquito, the Hawker Hurricane, and the Avro Lancaster. Rolls-Royce technology even powered the American P 51 Mustang, as the engine was built under licence.
In the 50s and 60s the aero engine industry was rationalized, and Rolls-Royce merged with Bristol Siddeley, itself a combination of Armstrong Siddeley and Bristol, in 1966. However the development and technical problems associated with the engines for the TriStar aircraft forced Rolls-Royce into receivership in 1971, and it was nationalised by Prime Minister Edward Heath. In 1973 the motor car division was sold off to Vickers.
Rolls-Royce has obviously performed well for its investors in the last few years, and for the spread trader the fact that it has made large gains is something that could have been exploited. The company has a large installed base of equipment that it continues to service for extra revenues which gives the business stability and relatively dependable profits. In fact it, is estimated that around 70% of Rolls Royce”s installed base of engines in the civil aerospace market fall under its total care management maintenance package. But the aircraft industry typically requires massive investment for any new developments, and this can cause a turnaround in fortunes, even for a large company such as Rolls-Royce. However, the flexibility of spread trading means that if Rolls-Royce should become over committed, you will still be able to make a profit from your betting.
Rolls-Royce Holdings Rolling Daily
If you find that your technical analysis of the share price shows that Rolls-Royce will continue to go up, you may be tempted to place a long bet, staking perhaps £4.50 per point. The current price for a rolling daily bet is 834.7 – 836.3, so your bet would go on at 836.3.
Once your bet is placed, one of two things happens. Either the price moves in the direction of your bet, and you can close your trade for a profit, or the price moves against you and you are forced to cut your losses before you lose too much. Looking first at the price moving in your favour, perhaps it might go up to 874.3 – 875.9, and you could close your bet and collect your profits. Working this out, the bet closed at 874.3, up from a starting price of 836.3. That means you gained 38.0 points. As your bet was £4.50 per point, you have made a total of £171.
If the price moved against you, you might choose to close your bet and cut your losses when it drops to 808.2 – 809.8. The long bet closes at the selling price of 808.2, so taking this away from the starting price you find you have lost 28.1 points. For your chosen size of stake, that amounts to £126.45.
Many spread traders use a stop loss order to control their losses. With this order, your spread betting provider will close your losing bet at a certain level even if you are not watching the market. You would normally place a stop loss order when you open your original bet. Suppose using this technique your losing bet was closed when the quote was 819.6 – 821.2. Your bet was placed at the price of 836.3, and it closed at 819.6. The difference between these is 16.7 points, which for your wager would have lost you £75.15.
Rolls-Royce Holdings Futures Style Spread Bet
Suppose you look at Rolls-Royce Holdings charts, and decide that the price will continue to go up. You may be tempted to place a buy bet, taking a long position at £5 per point, and doing so on the far quarter futures style bet which allows you to hold onto your bet without cost for more than six months, if it is continuing to increase. The current quote for the far quarter is 835.9 – 846.0.
You may prove to be correct, and hold on to the spread bet until the price reaches 892.3 – 903.1, when you decide to close your bet because the up-trend seems to be slowing. Working out how much you have made, you note that you placed your bet at the buying price of 846.0, and it closed at the selling price of 892.3. 892.3 minus 846.0 is 46.3 points, and multiplying by £5 your total winnings are £231.50.
It is difficult to predict the markets, so the price may have come down after you placed your bet, and you may consider closing your trade to prevent further losses. Even though this is a futures style bet, you are free to close the trade at any time. Perhaps the price came down to 803.2 – 814.0, so you closed your spread trade at 803.2, the selling price. 846.0 less 803.2 is 42.8 points, and for the same £5 bet this would have cost you £214.
This is a futures style bet, and you are looking for it to profit over a period of weeks or months. That means you may not be watching the price all that closely, and not notice if you are getting into a losing situation. If you placed a stop loss order when you opened the bet, your broker would take care of that for you. Suppose you did so, and your bet was automatically closed when the price dropped to 818.0 – 829.4. The closing price was 818.0 in this case, and taking this away from 846.0 you have lost 28.0 points. For your size of bet, this would have cost you £140.
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