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Why Trade The Front Month?
- Because that's where the volume and business is
- Therefore the spread between the bid and offer will be the tightest
- In the table below you'll see that the spread in the front month Dec is smaller than the price being quoted for the March FTSE 100 spread bet
The Date is November 2003 (FTSE 100 spread bet market)
|
Bid-Offer
|
Spread
|
| Dec 2003 |
4265-4270
|
5 Points
|
| Mar 2004 |
4293-4302
|
9 Points
|
Why Is There A Price Discrepancy Between the Cash Price & Spread Bet Price?
You may well see Vodafone shares trading in the cash market at £1.21 but the Spread Betting company's mid quote is at £1.23 for the June contract. This price differential between cash and spread bet quote is known as the 'cost of carry'.
The cost of carry is a mathematical equation that takes into account the fact that with a spread bet (or any forward contract like a future) you only have to put up a percentage of the actual cost of the security in order to control the asset. Cost of carry will also take other considerations into account such as dividends.
- If you bought 1,000 shares of Vodafone at £1.21 through your stockbroker then he'd ask for a cheque for £1,210 (commissions & Stamp Duty excluded)
- But with a spread bet because they're traded on margin you might only have to put up 10% as a deposit
- So the cost of carry takes into account the fact that interest can be earned on the surplus money, and that's why you'll always see a price differential.
The cost of carry will go down as the spread bet contract, say the March in this case, gets nearer to expiry. So on the final day the spread bet mid price will be the usually be the same as the cash price.
| LearnMoney Comment - The technicalities of why this market is priced at a different price to related market etc is really not that relevant. For example Vodafone might be priced at £1.25 in the cash market but the June spread bet priced at £1.275 and the Sep at £1.2925.
Take the assumption that the spread betting firms have sophisticated computer programs for working out their prices in relation to the cash market. Therefore their prices are always correct at that time. Instead, concentrate on trying to figure out where the market is going and how to make money.
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Spread Bets Are Always Settled In Cash
- With a spread bet you never control the underlying asset and all bets are settled for cash
- If you go long the gold contract then you can never demand actual gold in lieu of settlement, and the same goes for a cash share such as Barclays
- In effect you are just betting on the movement in price of the instrument you're trading on
- With shares you will also never be entitled to receive a dividend, but you will receive payment for the dividend via the cost of carry (this is a complex point, basically it means that if BT pays a 5p dividend per share and you're long the spread bet, then you'll still receive the 5p. Not via a special payment but via an increase in the spread bet price)
- Also because you never own the shares when spread betting you cannot vote in such matters as company AGMs.
What Happens If You Forget About a Spread Bet And The Contract Expires?
- Not a problem because Spread Bets are always settled in cash
- If you're long £5 (a point) of March Vodafone spread bet and it expires, your position will be settled against the spread betting companies' official settlement price which is usually the cash settlement price of the instrument minus their spread
If you want to rollover a spread bet in the next month, then not only is it always your prerogative but you must inform your spread bet broker by telephone and instruct him to roll it over. If you have a position in a month that is about to expire and you do nothing, it will always be settled against the spread betting company's official settlement price.
For further education on spread betting please go to our Order Types section
<< Page 4 - Spread Bet Basics
