Top Spread Betting Strategies

Among the many opportunities to trade, hedge, or speculate in the financial markets, spread betting appeals to those who have substantial expertise in identifying price moves and who are adept in profiting from speculation. But this particular strategy isn't for everyone because it can be risky and result in major losses. It is also illegal in many jurisdictions. But if spread betting is legal in your market, here are a few strategies you could follow.

What Is Spread Betting?

Spread betting involves placing a bet on the movement in an asset price. The asset can be any form of securities, currency, cryptocurrency, or a financial market. The person making the bet doesn't actually need to own the underlying security. Rather, they bet on the movement in its price. Because it relies on speculation, spread betting is often considered to be a form of gambling.

One thing should be made clear about spread betting: The practice is illegal in the United States. That said, it's still a legal and popular practice in some European countries, particularly in the United Kingdom. For this reason, all examples quoted in the following strategies are cited in British pounds (GBP).

Technical Analysis Strategies

Popular betting firms like U.K.-based CityIndex allow spread betting across thousands of global markets. Users can engage in spread betting on assets like stocks, indices, forex, commodities, metals, bonds, options, interest rates, and market sectors.

Technical analysis is an investment strategy that involves the use of historical data and information to make predictions about the future movement of asset or market prices. Technical analysts may use stock charts, graphs, and past prices as some of the tools in their trading activity. This can also be applied while spread betting.

To do so, bettors often apply trend following, trend reversal, breakout trading, and momentum trading strategies for various instruments, and across various asset classes such as commodities, FX, and stock index markets.

Spread Betting Around Corporate Actions

Corporate moves can trigger a round of spread betting. For example, let's consider when a stock declares a dividend and it subsequently goes ex, which means it is set to expire on the declared ex-date. Successful bettors keep a close watch on particular companies' annual general meetings (AGMs) to try and get the jump on any potential dividend announcements or other critical corporate news.

Say a company whose stock is currently trading at £60 declares a dividend of £1. The share price starts to rise up to the level of the dividend. In this case, that's somewhere around £61. Before the announcement, spread bettors take positions intended to gain from such sudden jumps. For example, let's assume that a trader enters a long-bet position of 1,000 shares at £60, with a £5 per point move. So in our example, with the £1 price increase upon the dividend announcement, the trader gains:

£5,000 = (£1 x 1,000 shares x £5.00).

Similarly, bettors will seek to take advantage of the dividend's ex-date. Assume that one day before the ex-date, the stock price stands at £63. A trader may take a short position of 1,000 shares with a £10 spread bet per point. The next day, when the dividend goes ex, the share price typically falls by the (now-expired) dividend amount of £1, landing around £62.

The trader will close his position by pocketing the difference: in this case, a £10,000 profit:

£10,000 = (£1.00 x 1,000 shares x £10 per point).

Experienced bettors additionally mix spread betting with some stock trading. So, for instance, they may additionally take a long position in the stock and collect the cash dividend by holding it beyond the ex-date. This will allow them to hedge between their two positions, as well as gain a bit of income through the actual dividend.

Structuring Entry and Exit

Structuring trades to balance profit-and-loss levels is an effective strategy for spread betting, even if the odds aren't often in your favor.

Let's assume that on average, a hypothetical trader named Mike wins four spread bets out of five, with an 80% win rate. Meanwhile, a second trader, Paul, wins two spread bets out of five, for a 40% win rate. Who's the more successful trader? The answer seems to be Mike, but that might not be the case. Structuring your bets with favorable profit levels can be a game-changer.

In this example, say that Mike has taken the position of receiving £5 per winning bet and losing £25 per losing bet. Here, even with an 80% win rate, Mike's profits are wiped out by the £25 he had to pay on his one bad bet:

(0.8 x £5.00 – 0.2 x £25.00) = –£1 loss

By contrast, say Paul earns £25 per winning bet and only drops £5 per losing bet. Even with his 40% win rate, Paul still makes a £7 profit (0.4 x £25 –0.6 x £5). He winds up the winning trader despite losing 60% of the time.

News-Based Strategies

Spread betting often concerns the price moves of an underlying asset, such as a market index. If you bet £100 per point move, an index that moves 10 points can generate a quick profit of £1,000, though a shift in the opposite direction means a loss of a similar magnitude.

Active spread bettors, such as news traders, often choose assets that are highly sensitive to news items and place bets according to a structured trading plan. For example, news about a country's central bank making an interest-rate change will quickly reverberate through bonds, stock indices, and other assets.

Another ideal example is a listed company awaiting the results of a major project bidding. Whether the company wins or loses the bid means a stock price swing in either direction, with spread bettors taking positions based on both outcomes.

Arbitrage Opportunities

Arbitrage opportunities are rare in spread betting, but traders can find a few in some illiquid instruments.

For example, say a lowly tracked index has a value of 205. One spread-betting firm is offering a bid-ask spread of 200 to 210 for the closing price, while another offers a 190 to 195 spread. So a trader can go short with the first firm at 200 and long with the other at 195, each with £20 per point.

• Scenario 1: The index closes at 215. The trader loses 15 (200 to 215) on their short position but gains 20 (215 to 195) on their long position.
• Scenario 2: The index closes at 201. They lose one (200 to 201) on the short position but gain six (201 to 195) on the long position.
• Scenario 3: The index closes at 185. The trader gains 15 (200 to 185) on their short position but loses 10 (185 to 195) on the long position.

In each case, the trader still gets a profit of £250, as they net five points, at £20 per point. However, such arbitrage opportunities are rare and depend on spread bettors detecting a pricing anomaly in multiple spread betting firms and then acting in a timely manner before the spreads align.

The Bottom Line

The high profit potential of spread betting is matched by its serious risks: the move of just a few points means a significant profit or loss. Traders should only attempt spread betting after they've gained sufficient market experience, know the right assets to choose, and have perfected their timing.