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Guaranteed Stop Losses With Share Bets - An Example
Stop losses on spread bets are never guaranteed to be filled at the their trigger price. For example, a spread betting client buys £5 a point of Barclays at 472 and places a stop loss to sell the position at 450, should it move lower. If the following day Barclays opens at 435, the stop loss would be filled at around this price, suffering what is referred to as 15 points of negative slippage.
If you instead place a guaranteed stop loss or, as some spread betting companies call it a controlled risk bet, at 450, then this is where the position would be filled even if Barclays opened down at 400.
But the spread betting company will charge you a small fee for using a guaranteed stop loss which will be added to the spread when you initiate the trade.
An Example of a Guaranteed Stop Loss on a Share Spread Bet
- The price quoted for the March Barclays spread bet is 468-472
- You decide that you want to go long and use a guaranteed stop loss to protect the position
- You must therefore inform your spread bet broker of this fact before he quotes you the market
- The spread bet broker now quotes you a different price of 463-477
- The extra 5 points either side is the spread betting companies charge for guaranteeing the stop loss should it be needed
- You buy £5 a point at 477 and place the guaranteed stop loss at 450
- Whatever happens in the market you now know your loss is fixed at 477-450 x £5 = £135
- Two days later Barclays issues a profits warning and the shares open at 415
- The guaranteed stop loss is activated at 450, no questions asked, and your total loss is the maximum budgeted for, or £135
- By spread betting with a guaranteed stop loss you have therefore saved yourself around £175 which would have been the negative slippage amount had you used a normal stop loss
