Spread Betting Hedging Strategies
Reduce potential losses from spread betting with hedging strategies
One of the best places for investors to use a hedging strategy is spread betting. As an investor you can use it to protect your portfolio. Let’s say you have $50,000 in NASDAQ shares and are apprehensive of prices dipping sharply over the next two months. Your first plan of action may be to sell the entire lot of shares and then wait and watch in the hopes of buying them back at a cheaper rate. However, this could turn out to be expensive, time consuming, and still not guarantee a healthy portfolio in the end.
Hedging – a powerful risk reduction strategy
With a hedging strategy you could hold onto your shares and using a spread bet you can place a Down Bet on the NASDAQ. For example, if the NASDAQ spread is quoted by brokers at 2600 – 2900 and the index is at 2800. You place a ‘Down Bet’ at approximately $18 per point and sell at the ‘bid’ of 2600. If the index drops by around 3% to 2716 your shares will dip by around $1500 (84 x $18). Let’s say your broker quotes 2715-2717 for a new spread. You can close the spread bet and purchase at 2717 and gain a profit of 183 points (2900 – 2717). At $18 per point you gain $3294. Even though it may not be enough to cover your losses completely it does count towards minimizing your losses. You have the choice to reinvest the gain and work towards building a portfolio close to the $50,000 of your initial investment.
Use hedging strategies wisely
There are several strategies that can be used to minimize losses and hedge your exposure. It is all about how much protection you can derive, which ought to influence your choice of strategy. The goal, by betting that the price of a stock or value of index will fall can protect you from short-term falls and also possibly earn a profit. Let’s say have suffered a loss on X spread of around $300. You ‘sell X spread’ at $14.50 at $10 per point. To close your position you buy it back later at $14.10, which is 30 cents or 30 points less which is worth $300. This will offset the original $300 loss you incurred. If the X share price were to rise by 30 points you would pay your spread bet broker the loss of around $300 but at the same time your shares will rise by a similar amount.
Hedge with a stop loss order
You can use a stop loss order to hedge spread bets. One of the advantages is that you limit your liability with a stop loss. However, that does not stop you from potential unlimited gains. For example, let’s say the spread offered by brokers for Coke is 58-59. You predict a fall in price and sell at $5 per point at 58. You can place a stop loss at 64. In this case, your profits will increase as the share price of Coke falls further. However, if there is a turnaround and the price rises above 64, you can limit your losses to 6 x $5 = $30. Some spread betting companies offer a guaranteed stop loss price even if your spread makes a sudden jump. The spread bet quotes are normally bigger which reduces your profit potential but you still get to hedge your position.