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financial spread betting risk management

if you place a bet and the market moves against you it can be agonising to watch your losses accumulating. psychologically, you hope for a recovery and cling on, but the spread worsens. finally - the bet expires and boom! you've lost a high multiple of your stake.

a key survival tactic in spread betting, as in share trading, is knowing when to bail out and cut your losses. you don't have to wait until the end of a bet - and take the full impact of the disaster. you can cut your losses by placing a buy bet to neutralise a previous sell bet, or by placing a sell bet to neutralise a previous buy bet.

imagine that on 1st january an indexation company is offering a spread of 6150 - 6200 on the ftse 100 index on a three month contract (i.e. the bet will expire on 31st march).

you think the market is going to fall so you make a sell bet at £10 per point. but after two months the market has risen and looks like it will continue to rise in the near future.

to cut your losses, you find out the spread being quoted on 1st march for ftse on a one month contract (i.e. expiring 31st march), and then place a buy bet.

so if the spread on 1st march was 6300 - 6350, you would buy at 6350.

your loss would then be:

sold at: 6150
bought at: 6350
difference: 200
stake: £10
loss: £2,000

that sounds bad, but if you hadn't closed out, and if the spread at 31st march was 6400 - 6450, you would have been down 300 points (450 - 150) and looking at a £3,000 loss

stop losses are used by active traders to make sure that their losses don't run out of control. the premise is straightforward:

at the time you place your bet, you instruct your indexation company to close out a bet if the spread reaches a certain level.

if you placed a buy bet, and the spread falls to your stop loss level, the indexation company will automatically input a sell bet.

if you placed a sell bet, and the spread rises to your stop loss level, the indexation company will automatically input a buy bet.
the effect either way will be to crystallise your losses at the time of the second bet. any further losses on your first bet will be neutralised by the mirroring second bet. usually stops are put in at the time you place a bet but they can be put in subsequently, and they can also be changed or cancelled half way through a bet.

note that the indexation companies offer no guarantee that they will fulfil your stop loss. if the market is moving very fast, they may not be able to close out your position at the level requested. they will do their best, but you may end up with losses higher than you allowed for.

a variation of the stop loss is the controlled or limited risk bet. here you instruct the indexation company to close out your bet if your losses reach a certain level and, importantly, with this kind of bet, there is a guarantee.

suppose you think that nasdaq is going to rise in the next quarter and you find a spread quote of 3,170 - 3,220.

you don't want to lose more than £1,000 so you ask for a controlled risk bet. the indexation company takes the middle figure in its spread (3,195 in this case), deducts its controlled risk spread - say 18 points - and offers a buy price of 3,177. that's the price you bet at.

if your stake was £10 per point, your losses will hit £1,000 if the spread descends to 3077. this would be 100 points off your buy price of 3177.

under the terms of the controlled risk, the indexation company will automatically close out your bet when the spread reaches 3077. you will owe £1,000, but you will at least be protected from the consequences of further falls in the nasdaq.
remember - the indexation company makes its money from the spread which is an intrinsic part of any bet. it has no interest at all in seeing its clients take large losses, because those clients won't trade again.

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