Is spread betting suitable for long-term traders?

Spread betting is particularly suited to short-term trading as it offers the ability to deal in and out of stocks in small sizes in a cost-efficient way where the leverage serves to magnify the potential return on capital. You spot a market opportunity, you open a spread bet trade, and then get out within a few hours or days, hopefully for a profit. Interestingly, there is even an old market adage that says that a long-term position is simply a short-term one that went wrong (and to some extent this is true).

Are Spread Bets suitable for Long Term Trades?

“Trading shorter time frames using spread betting and financial leverage is quite a world apart from investing over the longer term. Watch out for the many subtle facets you may meet along the way…”
With a traditional stock investment you would typically be in for the long haul, weathering the market fluctuations, but the goal for the short-term trader in spread trading is to take advantage and profit from smaller moves in the market.”

However, in some cases it can make sense to use spread bets for holding a position over several weeks or even months. In fact recent data from IG Index showed that one in five spread traders would prefer to be longer-term traders as they don’t use daily bets. This is particularly evident from bets on individual share bets where clients tend to have a longer-term view, which could be as much as weeks, months or, in some cases, even years. And of course there are future contracts which you can spread bet on if you have a longer-term time horizon for a trade and you can purchase contracts that are up to 9 months in advance. Indeed, even with rolling daily contracts, given the prevailing very low interest rates it is often advantageous to hold positions for longer periods but do keep in mind that you are paying daily financing interest (which at prevailing interest rates sums up to around 5% if holding a position for a year). In this respect longer-term trading has never been so cheap or more attractive but do keep in mind that this could change if rates were to start heading back to their long-term averages.

Most traders use spread betting for holding short to medium-term contracts as the spreads are very tight for rolling contracts. Another reason that most traders prefer to take shorter-term punts could be the leverage, which magnifies losses if the trade goes against you and makes it more difficult to run trades without having a very wide stop loss. Having said it was David Jones of IG Index himself who was quoted saying that the spreadbetters who hold their positions longest make the most profit. In practice, the timeframes spread bets are normally left open ranges from a minute by minute basis to a quarterly basis.

“Bulls tends to hold longer term positions while those who go short do so for only a few days, perhaps hitting a stock that has or is expected to issue a profit warning. With interest rates so low, it is quite cheap to hold a longer-term position. However, if you intend to hold positions over for the long-term, then you have to accept that a trade may go against you for long periods of time so you have to use larger stops or take on smaller trade sizes. It is also prudent to deposit more margin funds in your account than is required so as not to make full use of the leverage on offer.”

Indeed unlike options or warrants most spread bets can be rolled over indefinitely if you want to maintain the position, assuming you keep sufficient funds in your account to avoid any margin calls. I’d also say that because of low interest rates, it is quite cost-effective for medium-term traders to use rolling daily bets while quarterly contracts are more suited for running long term positions as these have the financing already built into the price quoted. When trading longer time-frames it is somewhat easier – less activity to monitor and record and less need to having to keep a constant eye on the markets. Note also that when trading long term positions it is important to give the market more space to move around (i.e. set wider stops) without knocking your trades on normal day-to-day market volatility.

Beware however that short-term spread betting requires that you are able to react swiftly to market movements as a few points can make a whole difference between a profit and a loss. For this reason, unless you have constant access, it may well be worth evaluating more medium to long-term trading timeframes. The thing is that spreads won’t be that much of a problem if you look to trade decent moves but if short term/day trading the spread will slowly eat your account till your money becomes the broker’s money. For a short-term trader apart from a trading platform, the pressure of having to frequently check the screen and being continually on the alert can easily lead to spread betting mistakes and indecision.

Whether you trade short term or long term depends to a certain extent on your trading personality and on the time that you have available for trading. If you have a 9 to 5 full-time job and can only trade for an hour at the end of the day, then swing trading might be easier for you as you are then able to take advantage of medium-term trends in the markets.

I’ve concluded that if holding for say 3 months+ then its more cost effective to use futures, and these can still be rolled over when they expire. However, one thing to keep in mind is that there is also time decay on quarterly bets. They are future bets and over time the price (not spread) decays towards the market price, making another expense that nobody really sees although I still think they have a useful place.

In the past the typical spread better used to male, of about 40 years of age coming from a professional background i.e. mass affluent. However, I’m not sure if this description still applies today. In practice, I’d say that spread betting investors make up a mix of traditional, long-only private investors looking to hedge some short-term downside exposure by running short positions against their equity holdings; and pure speculators looking to make short-term trades using spread betting. So while spread bets may not be the ideal vehicle for the long term buy-and-hold investing, it definitely has a place in any investor’s portfolio given the product’s flexibility. In fact, some investors use spreadbets for hedging purposes or to help with portfolio diversification.

Ultimately, the most important thing when trading over longer timeframes isn’t to do with interest rates. The important thing is to trade the way that suits you. The bottom line is that the profits will come from being correct in your view. This means you need the price to move strongly in your favour over the period.

“Running trades over longer periods requires a different approach – traders will often use quarterly contracts instead of rolling daily bets in order to control the cost of financing. Additionally, when trading on longer term scales, stops losses need to be placed further away than for shorter-term positions. This contrasts with short-term trading where you need to be ready to re-evaluate your view if the facts change, or face needlessly painful losses.”