Chapter 7
Types of Spread Bet
One of the major advantages of financial spread betting is the wide variety of bet and order types that spread betting companies offer their clients.
There are not only a large number of financial markets to choose from, but also different types of spread bets that you can place.
When buying, you’re betting on the price of whatever you’re betting on rising above the spread; selling the spread, you’re betting on the price going lower. Beyond that, different types of spread bets can be separated into:
- bets on various time frames; and
- different types of spread bet orders.
Spread betting across different time frames
Spread bets can be placed that cover different time frames. The primary time frame spread bets are as follows:
1. Daily spread bets
These are bets made by intraday bettors. They are good only for the trading day when they are made. Daily bets typically offer much tighter spreads. You can close your daily bet any time you like prior to the end of the trading day. Otherwise, it will automatically be closed out at the market price at the end of the trading day.
2. Rolling Dailies
Daily rolling bets are the most common type of spread bet nowadays. Rolling daily bets differ from daily bets in that they don’t expire at the end of the trading day. Instead, unless closed out, they roll over to the next trading day. Because they are normally priced using the underlying asset’s cash market the trader will incur a fee for rolling the bet each night – this is wrapped up in a small overnight funding charge.
3. Futures spread bets
Futures spread bets are popular among bettors who like taking medium-term positions. Unlike cash markets, which is for immediate delivery of an asset, a futures contract is for delivery at a specified point in the future.
Most futures have standardised expiry or delivery dates – e.g. March, June, September, December. However, like dailies, you don’t have to wait for the expiration date to cash in a winning bet. You can close out your bet at any time prior to expiration.
This is a bit technical, but because the price is for delivery at a future point in time there is no overnight funding charge on a futures spread bet. However, this ‘cost of carry’ is factored into a spread bet through a wider spread.
If you leave your futures bet in place, then the price of the underlying security you’re betting on at the time of expiration determines whether your bet is a winner or a loser and the amount of your profit or loss. You can let it expire, but nowadays your broker will ask you if you want to roll it into the next futures contract for a small fee.
For most financial futures bets, there are typically at least two quarters at a time open for trading. Therefore, you can place a spread bet for either the nearest expiring quarter or a quarter further out in the future.
To figure this out you need to know how long you are likely to hold the bet for. When you have estimated this, take the tighter spread x stake amount paid on a daily bet and add in the cumulative overnight funding charges, which will be charged each night you have the daily rolling bet open.
Then, compare this to the wider spread of the future x stake amount, remember the futures bet doesn’t incur overnight funding.
Whichever has the lowest cost to trade is your answer.
Read:
4. Binary Bets
Binary bets differ from regular spread bets in that, rather than the profit or loss being calculated on how many points the market moves for or against your spread entry price, binary bets are an “all or nothing” bet. If your binary bet is a winner, your profit equals the full amount of your bet. If your binary bet loses, then you lose your total bet amount.
Binary bets are now prohibited in the UK and EU because the regulators couldn’t see the benefit for investors and felt the marketing of them was getting too aggressive.
Read: What is Bet Per?
Types of spread bet orders
Besides placing spread bets on different time frames, you can also use a variety of order types to either enter or exit a spread bet on your spread betting brokers trading platform. The following are the order types commonly offered by most spread betting companies.
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1. Market orders
Market orders are the most commonly used type of order in spread betting. Market orders are executed immediately after being placed, at the best available spread price. When you press submit on your deal ticket, and the trade confirmation pops up straight away, that is a market order being executed very quickly.
In rapidly moving, volatile markets, the price may be changing quickly. Therefore, there is no guarantee of getting a specific price, although the price will usually be either the same as, or close to, the price quoted just before entering your order.
2. Limit orders
We introduced limit orders in chapter 4 but to recap, limit orders specify a certain price and are only filled if they can be executed at the specified price or better.
If the spread drops to 45-47 or lower, then the order will be filled. If the ask price on the spread never falls as low as 47, then the order will not be filled.
Limit orders are often used to exit an existing spread bet, taking profits. If we look again at the example above, if you had bought the spread on a stock at 48-50, then you might enter a sell limit order to close out your position at 55.
If the bid price of the spread (the lower price) rises to 55 or higher, then your bet will be closed out at that price or better.
3. Stop orders
Stop orders are used to manage risk and limit potential losses on an existing spread bet. They are also sometimes used to enter a spread bet. When used to manage exposure and potential loss on an existing spread bet, stop orders are referred to as stop-loss orders.
Let’s say you are only willing to risk losing five points on a spread bet that you buy at a price of 50. You can enter a stop-loss order to close out your bet if the spread drops to 45 or lower. If it does, then your stop-loss order will automatically be triggered, and your spread bet will be closed out at the best available market price at that time.
As it effectively becomes a market order when triggered, a stop-loss order does not guarantee having your order filled exactly at your stop price. In a volatile market, your stop order may be filled at a price substantially worse than your specified stop loss.
4. Trailing stops
You can also enter a stop-loss order known as a trailing stop. A trailing stop moves a set distance inline with the price when it is moving in your favour. If the market backtracks then the trailing stop won’t backtrack with it. If the market backtracks enough it will trigger at the distance you’ve specified.
If it advances to 75, your stop loss would automatically be adjusted to 60, 15 points back from that high. Using a trailing stop can help you both minimise risk and lock in a certain amount of profit.
Stop orders can also be used to enter a spread bet. You can place a buy stop to trigger buying the spread only if the spread price advances to a certain level, or a sell stop to sell short the spread only if the spread price declines to a certain level.
5. Market on close (MOC) order
A market on close order is just what it sounds like – a market order that only goes into effect just before the close of the trading day.
You can use a market on close order to either initiate a spread bet or to close out an existing spread bet. Market on close orders are filled at the best available market price, sometime within the last two minutes of the trading day.
6. One cancels the other (OTO)
An OTO order is used when a spread bettor wants to enter either a buy or sell spread bet, but only if the market’s price movement is going in the direction in favour of their bet.
If the spread is advancing, then the bettor’s buy order will be triggered, and their sell order cancelled. Conversely, if the market declines so that the sell order is triggered, then it will be filled, and the buy order will be cancelled.
Read: How to Identify and Draw Support and Resistance Levels on Any Chart
In summary
There is a wide range of bets and orders to help traders trade the way they want to. Different spread betting brokers offer different types of orders, so be sure to check with your personal spread betting firm to see which spread bet types are available to you.
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