This is a very important point and one that many people misunderstand when they start spread trading.
Let’s say that you wish to go long when the market price (on a chart) gets to 525. Many novice traders I have coached will go long as soon as the spread buy price reaches 525. THIS IS WRONG. You must look at the market mid price and the spread mid price and note the normal DIFFERENCE between the two when the market is trading. Then allow for this difference in deciding when to open a trade. Let’s look at a simple example:
The market mid price is currently 520 and the near month spread is 519 – 521. The mid price is the same as the market price so if you want to enter a trade at 525 then you will buy when the SPREAD mid price is 525. If the spread at that time is 524 – 526 then you should buy at 526.
If you are going to buy the far month contract you look at the market mid price at say, 520 and the spread at that time is 521 – 524. The spread mid price is therefore 522.5, which is 2.5 points above the market mid price. Again you want to enter at 525 market price but now you must enter the trade when the spread mid price is at 527.5 (2.5 points above the market mid). If at that time the spread is 526 – 529 then you will buy at 529 to enter at the correct market level of 525.
Please be sure that you understand this aspect of spread trading or you will be entering trades at the wrong time. This process also applies to setting stop losses and closing trades at the correct level.
Your spread betting provider will normally quote four types of bets, each with a different expiry.
A quick search for British Airways on 28th October 2010 from my provider yields the following results:
The first quote expires the same day on which I did the search (28th October 2010). What this means is that if I opened a trade on 28th October it will automatically close on the same day, typically at the UK market close at 16:30.
With a traditional stock broker, you would close the trade at a time of your own choosing; the same day or 3 years from now. As I am not a day trader I would never open a spread bet that expires on the same day; my trades tend to last for weeks and months and sometimes longer. I would have to open a new spread bet each day incurring the cost of the spread as I do so.
The second quote has an expiry of 10th December. This would allow my trade to run for about 5 weeks before I had to open a new spread bet if I wanted my trade to continue. In this instance, my spread bet would expire at the close of business on 10th December. If the share price of BA had risen in value, the trade would be closed out at a profit. If the share price of BA had gone down in value, the trade would be closed out at a loss.
If I were to have traded BA on 28th October, I would have chosen the ‘December contract’ or the spread bet with the expiry date of 10th December. This is because I tend to not trade within about 2-3 weeks of expiry to prevent my spread bet from closing too early.
One other thing to note about expiry dates is that spreads get wider on expiry dates that are further away from the present. This is something to note rather than get too worried about so long as you make sure you are not paying for an unnecessarily wide spread. This is where having more than one spread betting provider can help as you could shop around for the tightest spreads if you are keen to control trading costs. I cover rolling daily contracts and futures in more detail here.
If you want to keep your trade open beyond the expiry date you need to roll it over. This is jargon for asking your spread betting provider to open a new spread bet in the following contract expiry period without incurring the cost of the spread. You will need to check with your firm regarding their terms and conditions.
By way of example, my provider will close a spread bet at expiry at profit or loss and then calculate a new opening price based on LIBOR and a rollover fee as a percentage of the opening price. The jargon and maths are somewhat confusing but what is certain is that it is a cost efficient way of keeping a trade open beyond the expiry date.
I will only ask for a rollover if I believe the share price will rise in value, not because it is cheap to rollover.
Slippage is jargon for the difference between the price at which you ask your spread betting provider to open or close a trade for you and the actual price they achieve for you. Slippage is not exclusive to spread betting it; occurs when trading shares.
By way of example, my provider has quoted the December contract for BA to buy at 279.94 as highlighted below.
If I want to close the bet, I would expect to get their quoted price above at 278.73. If they actually closed my trade at 277.73 then I would have suffered slippage of 1.0 (278.73 minus 277.73). As you would expect, the amount of slippage varies between spread betting providers i.e. some are better than others.
Slippage is a real cost to traders and one which is often overlooked. You can always talk to your spread betting provider about slippage or any aspect of the service they provide you.