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Use of Spread Betting

Stocks and Shares ISA , Choosing funds for ISA's, risk factors for funds etc
Investment strategy discussions not dealt with elsewhere.
moorfield
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Use of Spread Betting

#199097

Postby moorfield » February 5th, 2019, 4:28 pm

Curious to know if anyone here currently using spread betting (futures, not options) to create positions alongside their (FTSE) share holdings, and why. For example, are you shorting rather than selling your utilities holdings (SSE, CNA etc.) if you feel the nationalisation risk needs mitigating. Or holding long positions using conservative deposits. Having briefly dabbled with options, a project which I documented here and felt became unrealistic to continue after the ESMA changes last year, I'm now toying with the idea of using spread betting again - this time as a (sort of) synthetic pension contribution, eg. £100 exposure to RDSB for an (initial) £60 deposit. I am flying a kite here so any discussion appreciated ...

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Re: Use of Spread Betting

#199179

Postby LooseCannon101 » February 5th, 2019, 10:22 pm

About 80% of spread betting punters lose. What is the point of spread betting?

I would much rather make grow wealthy slowly using a highly diversified world equity fund, than quickly grow the revenues and earnings of casino-like companies that prey on the gullible.

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Re: Use of Spread Betting

#199210

Postby EssDeeAitch » February 6th, 2019, 6:56 am

Spread betting is not something I would use, I think buying shares in William Hill is safer.

On a similar theme, I was reading some stuff on forex trading recently but as far as I can see, I might as well put money on Flighty Lad in the 3 O'Clock at Haymarket or neighbors of zero on the roulette wheel.

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Re: Use of Spread Betting

#199222

Postby Bubblesofearth » February 6th, 2019, 8:31 am

LooseCannon101 wrote:What is the point of spread betting?


Couple of reasons spring to mind;

1. Collection of premiums from selling calls on shares you own.

2. Adoption of long positions whilst retaining the bulk of your money in cash in order to minimise tax (SB is tax-free)

I entirely agree that you are highly likely to lose if using SB purely as a vehicle for gambling.

BoE

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Re: Use of Spread Betting

#199230

Postby tjh290633 » February 6th, 2019, 9:13 am

EssDeeAitch wrote:Spread betting is not something I would use, I think buying shares in William Hill is safer.

On a similar theme, I was reading some stuff on forex trading recently but as far as I can see, I might as well put money on Flighty Lad in the 3 O'Clock at Haymarket or neighbors of zero on the roulette wheel.

I took that view long ago. Better to be the bookie than the punter.

TJH

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Re: Use of Spread Betting

#199259

Postby hiriskpaul » February 6th, 2019, 10:57 am

I currently have long positions on FTSE futures and the iShares S&P 500 ETF CSP1. I don't trade in and out of these, just let them roll over each quarter. The FTSE futures position has been rolling over since 2013. I ran a similar quarterly rolling bet on the iShares bond ETF SLXX for about 5 years, finally closing out in 2014 following a few years of yield curve flattening and narrowing credit spreads - the drop in yield and increased duration stopped making the bet look quite so asymmetric. I have bet on individual FTSE securities in the past, mainly banks, but for some reason I cannot quite remember I did Unilever and L&G. These were all short term long bets made when prices seemed unreasonably low though, rather than long term positions of the sort you are suggesting.

Individual securities tend to have wider spreads than futures and ETFs, making the rollover costs that bit more expensive. For this reason if you did want to run a geared portfolio, you would be better off spread betting futures and select ETFs and holding the individual securities such as RDSB in your SIPP/ISA. Futures/ETFs tend to be far less volatile as well which should make margin management less of a headache. Unless that is you intend to run a widely diversified portfolio in a SB account, in which case your portfolio volatility would obviously reduce.

You should bear in mind that if you take long positions in anything denominated in a foreign currency your position will not mirror that of an actual long position in the underlying. You will have a sterling hedged position instead, which is probably not what you want. To gain full exposure you need to take an appropriate position in an FX future as well. That is why I bet on CSP1, denominated in GBP, rather than S&P 500 futures.

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Re: Use of Spread Betting

#199269

Postby moorfield » February 6th, 2019, 11:46 am

LooseCannon101 wrote:About 80% of spread betting punters lose. What is the point of spread betting?


They lose because they over leverage themselves at (exposure to equity) ratios of typically 20x+ etc. What I'm suggesting is using a ratio of 1.67x (compare that to a house buyer at 10x), which in the example could absorb a 50% drop in RDSBs sp (based on IGs margin rates).

Why? Bubblesofearth has touched on this.

Bubblesofearth wrote:2. Adoption of long positions whilst retaining the bulk of your money in cash in order to minimise tax (SB is tax-free)


I was clobbered again by income tax last week and - thinking ahead - another 30 years of dividend compounding will be clobbered by the >75 pension LTA (assuming those rules don't change), other than employer contributions I don't want to make any more. I'm not convinced by the VCT rebate to buy heavily into these illiquid products. So I'm looking at using leverage as a (sort of) proxy for income tax lost by not continuing pension contributions.

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Re: Use of Spread Betting

#199271

Postby moorfield » February 6th, 2019, 11:57 am

hiriskpaul wrote:Unless that is you intend to run a widely diversified portfolio in a SB account, in which case your portfolio volatility would obviously reduce.


Yes that's what I have in mind. The same 15-20 shares that one might put in an HYP.

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Re: Use of Spread Betting

#199273

Postby Snorvey » February 6th, 2019, 11:58 am

Isn't there a cost to financing these leveraged long positions?

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Re: Use of Spread Betting

#199274

Postby langley59 » February 6th, 2019, 12:00 pm

I run a buy and hold portfolio of shares, investment trusts, ETFs and Fundsmith (plus a few bonds and NS&I premium bonds and index linked savings certificates) for the income which is now what my family has to live off since I stopped working 2 years ago. I have used spread bets quite a lot in the past across a variety of trading strategies and have a net profit over time.

However I have been thinking a lot recently about simplifying my spread betting and have decided to focus solely on quarterly index FTSE futures following a momentum strategy (MACD crossover). I have back tested it over 2018, going long when the daily MACD histogram turns positive (the MACD line crosses up and over the signal line) and switching to going short when the reverse occurs. This has been profitable over 2018 with 14 trades being triggered (ignoring some small whipsaws which would have had negligible effect other than frustration). The profitability can be further enhanced by setting an in the money stop once the trade is in profit to prevent a loss if the market switches back unexpectedly.

Why would I want to do this you may ask, if the income from my long term buy and hold portfolio is enough to live on, why take any further risk? Well partly its fun and as long as its profitable it gives a secondary income source. Also when the market falls you make money by being short and this helps offset any angst from seeing your long portfolio reduce in value (the compensation for this used to be thinking I could add more to my portfolio at lower prices but this benefit has reduced as I have approached full investment). Why the FTSE? Well this is probably as good an index as there is to represent global equity markets which is what my portfolio represents and the spread is narrower than most.

I would welcome thoughts from others on this. I have executed this trade in small size only to date as a test (ie. it would not effectively compensate for the value lost in my portfolio in a fall) but am planning to do it in larger size particularly on the short side once the Brexit endgame has played out...if it ever does.

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Re: Use of Spread Betting

#199276

Postby moorfield » February 6th, 2019, 12:03 pm

Snorvey wrote:Isn't there a cost to financing these leveraged long positions?


Yes there is a financing cost of course. Most SBs reflect that in the price of quarterly rolled contracts, and some "credit" dividends of (long) shares that pay such. I'm a little rusty on how that works and am researching currently.

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Re: Use of Spread Betting

#199278

Postby gryffron » February 6th, 2019, 12:10 pm

hiriskpaul wrote:You should bear in mind that if you take long positions in anything denominated in a foreign currency your position will not mirror that of an actual long position in the underlying. You will have a sterling hedged position instead, which is probably not what you want. To gain full exposure you need to take an appropriate position in an FX future as well. That is why I bet on CSP1, denominated in GBP, rather than S&P 500 futures.

I don't understand that. Surely it makes no difference at all what the position is DENOMINATED in. All that matters is the currency of the UNDERLYING security. You, as a sterling investor, will suffer EXACTLY the same currency risk regardless of whether you track the S&P with a dollar denominated fund or a sterling fund (or a euro one for that matter). The only difference with a sterling fund is that the currency movements are hidden from you inside the fund. But they are still exactly the same.

I accept you could actively offset a currency spread bet against your foreign (dollar) assets. But that doesn't seem to be what you are suggesting.

Gryff

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Re: Use of Spread Betting

#199280

Postby Snorvey » February 6th, 2019, 12:26 pm

moorfield wrote:
Snorvey wrote:Isn't there a cost to financing these leveraged long positions?


Yes there is a financing cost of course. Most SBs reflect that in the price of quarterly rolled contracts, and some "credit" dividends of (long) shares that pay such. I'm a little rusty on how that works and am researching currently.


If your buying, say, a HYP type portfolio using no gearing, there would be no financing costs - am I right?

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Re: Use of Spread Betting

#199284

Postby moorfield » February 6th, 2019, 12:32 pm

Snorvey wrote:If your buying, say, a HYP type portfolio using no gearing, there would be no financing costs - am I right?


Correct, but I don't want to buy £100 worth of HYP type(*) shares inside a pension. I want to buy £100 worth of shares outside a pension using the £60 I have left over after income tax.


(*)Using "HYP" is a slight misnomer here. It would not be an income strategy as HYP is.

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Re: Use of Spread Betting

#199304

Postby hiriskpaul » February 6th, 2019, 1:27 pm

gryffron wrote:
hiriskpaul wrote:You should bear in mind that if you take long positions in anything denominated in a foreign currency your position will not mirror that of an actual long position in the underlying. You will have a sterling hedged position instead, which is probably not what you want. To gain full exposure you need to take an appropriate position in an FX future as well. That is why I bet on CSP1, denominated in GBP, rather than S&P 500 futures.

I don't understand that. Surely it makes no difference at all what the position is DENOMINATED in. All that matters is the currency of the UNDERLYING security. You, as a sterling investor, will suffer EXACTLY the same currency risk regardless of whether you track the S&P with a dollar denominated fund or a sterling fund (or a euro one for that matter). The only difference with a sterling fund is that the currency movements are hidden from you inside the fund. But they are still exactly the same.

I accept you could actively offset a currency spread bet against your foreign (dollar) assets. But that doesn't seem to be what you are suggesting.

Gryff

As an example, take 2 S&P 500 ETFs, A denominated in USD, B in GBP. Buy either outright and your currency exposure is the same, so if GBP/USD rises 1% and the S&P 500 does not change, you will lose 1% in pound terms, nothing in dollar terms. The price of A would not change, but if you sold and converted to pounds you would suffer the loss. In contrast the price of B will drop as B is priced in pounds.

Now consider a spread bet in the same circumstances. A £1 bet on A would see no profit or loss following a 1% rise in GBP/USD, because A is priced in dollars and the price will not have changed. A £1 bet on B however would result in a loss because the price of B will have changed.

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Re: Use of Spread Betting

#199308

Postby hiriskpaul » February 6th, 2019, 1:45 pm

To illustrate the point I was making on rollover costs, the spread on the Mar forward for RDSB is currently 2472/2482.4 (0.50%). The spread on CSP1 is 20672/20690, (0.09%) and there is 4 points on the FTSE future (0.06%). That is why I suggest holding your index and ETF positions in a spread bet account and your individual shares elsewhere. Net result is the same, across your entire portfolio you are geared, but the frictional rollover costs are lower.

Borrowing costs are all about the same, but usually slightly lower on futures as those costs are market determined rather than being set by IG.

Not all ETFs have spreads as narrow as CSP1 by the way. Some are much wider.

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Re: Use of Spread Betting

#199331

Postby hiriskpaul » February 6th, 2019, 3:23 pm

moorfield wrote:
Snorvey wrote:Isn't there a cost to financing these leveraged long positions?


Yes there is a financing cost of course. Most SBs reflect that in the price of quarterly rolled contracts, and some "credit" dividends of (long) shares that pay such. I'm a little rusty on how that works and am researching currently.

If you bet on shares or ETFs with IG, you will be credited with the full dividend on XD date. If short you will be debited. Futures do not pay dividends of course, so expected dividends are reflected in the price. For example, the March FTSE contract is trading about 60 points lower than the spot price due to the absence of dividends from the future. If there were no dividends the future would be expected to be at a higher price than spot due to funding costs.

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Re: Use of Spread Betting

#199363

Postby moorfield » February 6th, 2019, 5:32 pm

hiriskpaul wrote:If you bet on shares or ETFs with IG, you will be credited with the full dividend on XD date. If short you will be debited. Futures do not pay dividends of course, so expected dividends are reflected in the price.



Interesting thanks. So on daily bets IG finance overnight at LIBOR + 2.5% ie. if I hold positions on higher yielding shares (like I would for an HYP > 4% ish) those charges should be offset by the dividend credits? In practice though I'd be holding quarterly rolling positions I think, as you say reflected differently in the price.

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Re: Use of Spread Betting

#199392

Postby hiriskpaul » February 6th, 2019, 7:27 pm

moorfield wrote:
hiriskpaul wrote:If you bet on shares or ETFs with IG, you will be credited with the full dividend on XD date. If short you will be debited. Futures do not pay dividends of course, so expected dividends are reflected in the price.



Interesting thanks. So on daily bets IG finance overnight at LIBOR + 2.5% ie. if I hold positions on higher yielding shares (like I would for an HYP > 4% ish) those charges should be offset by the dividend credits? In practice though I'd be holding quarterly rolling positions I think, as you say reflected differently in the price.

Yes, but the quarterly forwards have much lower funding costs than the DFBs, currently it works out around 0.3% per quarter, 1.25% per year. So you lose money on the rollovers with quarterlies, but save on the funding.

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Re: Use of Spread Betting

#199449

Postby hiriskpaul » February 6th, 2019, 11:30 pm

As an example long running spread bet, I have looked at the history of my FTSE futures position. Here are the rollovers and P/L per point up until DEC-18 expiry.

Rollover     Period   P/L per point
20/12/2018 DEC-18 -613.5
20/09/2018 SEP-18 -360.5
14/06/2018 JUN-18 725
15/03/2018 MAR-18 -260.5
14/12/2017 DEC-17 197.5
14/09/2017 SEP-17 -62.5
15/06/2017 JUN-17 79
17/03/2017 MAR-17 478
16/12/2016 DEC-16 303
16/09/2016 SEP-16 828.5
16/06/2016 JUN-16 -164
17/03/2016 MAR-16 117.5
18/12/2015 DEC-15 -53
18/09/2015 SEP-15 169
19/06/2015 JUN-15 -215.5
20/03/2015 MAR-15 567
19/12/2014 DEC-14 -338.5
19/09/2014 SEP-14 50.5
20/06/2014 JUN-14 315
21/03/2014 MAR-14 29.5
20/12/2013 DEC-13 -21.5
20/09/2013 SEP-13 492


Total profit/point was 2,262. The FTSE future value at the start of the first bet, on 21/06/13 was 6131. For a fully funded bet of say £1 per point=£6,131 margin, that gives a total return of 36.9% (ignoring any interest gained on the cash). If only 60% funded at the start, the return would have been 61.5% and the bet would have been 97% funded by 20/12/18. Comparing with the Vanguard FTSE 100 ETF from 21/6/13 to 20/12/18, 1 share paid out dividends of £7.37429 and the price went from £28.495 to £29.965, giving a total return of 31%. So rolling futures spread bets actually beat an ETF over the period, which is unusual. Over the long run I would expect the implicit funding costs of the futures to result in higher total performance for the ETF. It will be interesting to see how this develops in the future. Fully funded bets on securities rather than futures should always result in lower returns than for holding the security directly as all the cashflows will be aligned.

Gearing magnifies volatility and losses of course, so for funding at 60% a 40% drop in the underlying equates to a 67% drop in capital, so handle with care!


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