Trading differential markets are a perfect example of the financial market innovation that spread betting allows.
A differential market is simply the difference between two markets. It is often referred to as the spread.
The most popular differential market is the spread between WTI Crude and Brent Crude. Those that have a good understanding of oil markets will understand just how significant the driver of the differential in oil prices is.
They will also understand what drives the difference, and therefore have an idea on the outlook of that differential and be able to make a spread betting call accordingly.
Differential markets may include:
* UK 100 / DAX 30
* UK 100 / Wall Street
* Brent Crude Oil / US Crude Oil
An index example follows -:
If the FTSE 100 is 5950 and the German DAX 30 is 7050 then the difference is 1100. Therefore, a provider might offer a UK 100 / DAX (June) differential market of 1098 – 1102.
This means clients can spread bet on the differential getting larger than 1102 or getting smaller than 1098.
Differential markets are normally monthly or quarterly futures markets and therefore they have an expiry date. The above example is a ‘June’ market so if you haven’t already closed your trade beforehand the market, and any open trades on it, will be closed and settled on 17 June.