Spread Betting British American Tobacco
British American Tobacco [BATS] in some senses is an anachronistic company. For decades there has been opposition to smoking, with proven health issues, and yet BAT has continued to find ways in which to operate. Here is a chart giving monthly share prices over the past few years: –
As you can see, growth has been remarkably good, even over the period of the global economic crisis; the company has consistently grown revenue and profits for the last 5 years (till December 2012). This appears to be due to excellent active management.
British American Tobacco was founded more than a century ago, in 1902, and came from an joint venture of the UK’s Imperial Tobacco Company and the US’s American Tobacco Company. With a market cap of £61.3 billion, BATS enjoys formidable pricing power and has ample market share. In fact, British American Tobacco is the second largest cigarette company in the world, behind Philip Morris, and sells hundreds of brands in nearly 200 markets. The American Tobacco Company soon sold its share of BAT, in 1911, but Imperial Tobacco did not get rid of its interests until 1980. Curiously, BAT bought one of its parents, the American Tobacco Company, in 1994.
Based on its global reach and market strength across its four main global brands – Kent, Lucky Strike, Pal Mall and Dunhill – British American Tobaccoo (BATS) is a mainly considered a defensive play for those worried about market turbulence/ The policy in recent years has been to expand more into countries where smoking is still considered socially unobjectionable. The company is experiencing healthy growth in various regions ranging from Russia, Ukraine, Japan, the Middle East and Malaysia to South Africa and South Korea. In 2003 BAT acquired an Italian tobacco company and a Serbian tobacco company, in 2008 Turkish and Scandinavian tobacco companies, and in 2009 Indonesia’s tobacco industry. Meanwhile, in 2007, BAT closed its last UK production plant.
One way that BAT has sought to promote its image is through sponsoring sport. For instance, Formula One motor racing has depended on tobacco sponsorship, and BAT bought the Tyrrell team in 1997 for about £30 million. Ten years later, this arrangement was ceased because of a European directive that required legislation against tobacco sponsorship. Other beneficiaries of BAT’s largesse include the Cricket World Cup and the London Symphony Orchestra.
Increased taxation is always an issue with tobacco products being some of the most heavily taxed consumer goods in the world and history shows that the industry has a record of being hit by prohibitive legislation. However, the reports over the years that the tobacco industry was dead have proved to be exaggerations, and subject to your own moral stand, British American Tobacco may prove to be an interesting company for you to spread bet on.
How to Spread Bet on BAT shares: Rolling Daily
British American Tobacco has shown steady growth over recent years. The current quotation for a rolling daily spread bet on this company is 3146.4 – 3152.4. If you think that the growth will continue, you might want to place a long bet on the shares for £8 per point. Suppose that the price goes up to 3323.2 – 3329.2, and you decide to collect your winnings.
As it was a long bet, it was placed at the higher price of 3152.4, and it closes at the later lower price of 3323.2. Working out, that means you have gained the difference of 170.8 points with this spread bet. With a stake of £8 per point, that’s £1366.40 that you have won. As it is a daily rolling bet, rolled over each night by your spread betting provider, there may have been interest charges made each evening – but usually these are not very large.
It is great if the price goes up as you want it to, but sometimes you will not anticipate the correct direction. Perhaps after you placed your bet the price dropped to 3006.2 – 3012.2 and you decided to close your bet to prevent further loss. Now you have to work out how much you lost. The bet was placed at 3152.4, and when you closed it the selling price was 3006.2. 3152.4 less 3006.2 is 146.2 points. 146.2x£8 is £1169.60 that you have lost.
Another way that many spread betters choose to protect their accounts is to use a stop loss order to close the spread bet if the price moves against them by a certain amount. Say you had a stoploss order on this bet to close it when the price dropped by 80 points. This might take you out of the spread trade when the price was 3065.3 – 3071.3. The stoploss order will take you out of the spread bet at the best available price.
This time you have lost 3152.4 less 3065.3, which is 87.1 points, and which would cost £696.80.
British American Tobacco Futures Based
Most spread betting providers will allow you to make a futures based spread bets on the next three quarterly futures contracts. For British American Tobacco, the quote for the middle quarter which expires in five months is 3159.3 – 3171.3. The spread is larger than for a rolling daily bet, but there are no account charges on a roll over.
If you think that the share price is going to fall, you could place a sell or short bet at the price of 3159.3 for a stake of £7.50 per point, for instance. If you are correct, and the price fell you might close your spread trade and collect your profits when the quote goes down to 3024.6 – 3036.6. Your bet was placed at 3159.3, and it closed at 3036.6. The difference is 3159.3-3036.6, which is 122.7 points. Multiplying by your stake, you find you have won £920.25.
On the other hand, many spread bets do not make a profit, and the trick to being successful is to close these bets quickly before the loss on the trade becomes too high. Say the price went up, and you chose to exit the spread bet when it reached 3254.7 – 3266.7. The calculation is done the same way, except that these points count against you. 3266.7 less 3159.3 is 107.4 points, which would cost you £805.50.
It is usually considered a good idea to set an automatic stop loss order whenever you take out a spread bet. This order tells your spread betting provider to close your trade if it moves against you by a certain number of points, so say it closes the trade for you when the price reaches 3220.0 – 3231.2. This time you have lost 3231.2 less 3159.3 points, or 71.9 points. With a stake of £7.50 per point, you have lost a total of £539.25.
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