Spread betting is one of many various types of wagering on the outcome of an event. At this point, the pay-off is based on an open ended wager much like the stock market, rather than a simple “win or lose” binary outcome.
Financial spread betting has been a major growth market in the UK in recent years despite carrying a high level of risk. In the UK, spread betting is regulated by the Financial Conduct Authority rather than the Gambling Commission.
Binary betting is a variation of financial spread betting that displays odds as an index on a scale of 0 to 100. When the event concludes, the index display a score of 100 if the event happens and 0 if it does not. This yes/no conclusion is referred to as a binary outcome. Traders and investors wager an amount per point on the index that is akin to deciding on the number of shares to purchase or sell short. A profit or loss is made on the difference in the index score when the trade is unwound.
The Financial Spread Betting Handbook: The definitive guide to making money trading spread bets by Malcolm Pryor offers an overview of this and other strategies used in spread betting.
Service Providers
Spread Betting Example
The following example shows how spread betting (in this context) is similar to investing and trading in the stock market. Adjustments are made to the trade price for dividends and other corporate actions. Perhaps the biggest difference with investing in the stock markets is that the profits (in the UK at least) are tax free.
BP (NYSE: BP, LSE: BP) is trading on the LSE at 330p at 331p. That is the bid and the offer. Plus500, a spread betting company listed above was also offering the same market at 330-331. To make a trade, we use an ongoing cash bet with no definite expiry, (like the stock market) or “rolling daily bets” as they are sometimes referred to.
If the trader thinks the stock price is going up, they may choose to bet £10 a point. In this case, a point refers to 1 penny. The trader buys the spread, (stock) at the offer price. If at the end of the bet BP traded at 300-301p, the trade would be exited at 300p. The profit / loss would be (331 – 300) x 10 = £310. By altering the stake per point, in this example £10, traders are able to chnage the level of leverage used, thus introducing greater risk.
Note that the total maximum loss, should BP go bankrupt and go to 0p, could be £3,310. This would be the same as buying 1000 shares via the stock market.
Positions that are held overnight are charged a financing cost, or will receive it, if the position is short the stock. This might be set at LIBOR + an arbitrary percentage depending on the service provider. If BP is trading at 331p, then for each day the position is open, the financing cost will be 331p x 10 x 5% / 365 = £0.4534.
In addition to this charge / rebate, the trader is also required to provide sufficient collateral in the account to cover potential losses. This is often 5 or 10% of the total exposure of the position but may change in times of market stress. Cover can be as high as 100% for illiquid stocks. In this case £3,310 x 10% or 5% = £411.00 or £205.50. This may be updated on a daily basis or in real time. If additional collateral is not entered into the account the position may be automatically exited.
