Having looked at our spread betting strategies for shares, commodities and currencies, let’s look finally at hedging options for spread betting indices, which are again a very popular and liquid market for the spread betting companies. As you would expect the most popular indices are those quoted by the major exchanges around the world, including the FTSE 100, the DOW 30, the Nikkei 225 and the Hang Seng, and as I am sure you are starting to realise, we use correlation as our tool for identifying opportunities to hedge our spread bets in our trading strategy.
My favourite short term trading strategy is to use the daily bets on the FTSE 1oo and on Wall Street, which as I am sure you know, will tend to correlate positively, with the UK index generally following the US market once it opens in early afternoon, UK time. The market behaviour for the indices is of course cyclical, with a certain amount of overlap between the markets, with the Far East, Asia and Australia overnight, leading into the UK open, followed by the US markets later in the trading session, followed by the Asia and Far East markets once again. With most of the spread betting companies now offering 24 hour trading, it is possible to trade these indices around the globe as the trading moves from session to session, which some novice traders find odd, given that the main exchanges such as the London Stock Exchange are only open from 8.00 am until 4.30 pm, and yet trading continues in the index after the cash market has closed. The reason for this is very simple and is based on the fact that the index quotes are based on the futures markets and not the cash markets, with the futures markets generally trading much longer hours. I have recently developed a site just for ftse betting and you can read more here.
So let’s look at a simple example, and I am sure you are getting the idea by now! In this case we are going to bet that the FTSE 1oo is bullish and therefore to hedge our bet with a balancing position on the Wall Street daily. As the FTSE 100 and Wall Street contracts generally correlate positively, we will need to open a buy position on one and a sell on the other. Now with this trade we are comparing like with like as an index point, but is each index point equivalent in terms of the daily movement? The answer here is no, as the FTSE 100 will generally move around an average of 60 – 80 index points in day, whilst the Dow Jones Industrial Average will tend to move, on average, around twice this amount. If we look at this from a percentage perspective, the FTSE 100 is currently trading around the 5000 mark, whilst the Dow Jones is currently around the 10,600, so a 1% to 2% movement which is typical for most days equates to 50 – 100 on the FTSE and 106 – 212 on the DJIA, so roughly double. In other words a 1 index point move in the UK index will equate to a two point move in the US index. So in order to set up our balanced hedging strategy we need to double our bet on the FTSE 100 contract for the strategy to be effective. and we would therefore buy the FTSE 100 at £2 per index point and sell the Wall Street daily contract, but at £1 per index point. As we are opening the daily contracts here, which expire at the market close, we need to be confident that we can expect some market movement and volatility during the trading session. If we plan to run this trade longer, then we need to look at this strategy using the rolling contracts which allow for rollover into following sessions, but these will be more expensive in terms of the funding and the spread.
There are of course many other ways to hedge the indices using constituent stocks and shares which would need to be weighted and balanced accordingly, but there are many ways to be creative with these hedging strategies, and I hope I have given you a few ideas. One of the newer indices now being quoted is the VIX, which is an index of the equity markets in general, and this again makes an excellent vehicle for spread betting strategies.
Finally, I hope you have found this site to be useful, interesting and informative and that it has given you some ideas for some spread betting strategies of your own. The ones I have covered here are very simple,and are really only the starting point – many that I use are more complex and are built across various markets and instruments. However I hope this site helps you to devise some more on your own. Good luck with your trading and spread betting and I hope you find these strategies useful and helpful in keeping your trading profits growing, more slowly perhaps, but growing nevertheless.