There are a couple of ways spread betting can be used to hedge exposure. You can hedge pretty much anything as the markets offered by spread betting brokers are so varied.
Equity and Stock Hedges though spread betting
One of the most common hedges is against profits from equity investments. Traditionally options would have been used to lock in profits on a long-term investment.
Let’s say you have 10,000 shares in Vodafone which you bought at 100 two years ago. The current price is 200 and you have doubled your money.
If you sell your cash investment you will have to pay capital gains tax. Plus you may think the stock has reached a peak and this it will correct in the short term. So instead of selling your stock, you can simply open a short spread bet of the equivalent exposure as a spread bet.
If you short £100 per point in Vodafone and the share price drops by 50 you will have made £5,000 on your spread bet position tax-free (subject to change) to cover the value of your 10,000 Vodafone shares losing £5,000 in value. you’ve also saved yourself the commission, tax and stamp charges.
- Pros – the ability to short single stocks
- Cons – shorting comes with potentially unlimited losses
Portfolio hedges with spread betting
These work on the same principle as equity hedges. Instead of buying a put option on the market you can sell the FTSE index to profit if you think the overall market is looking overpriced.
If you have a basket of stocks worth £100,000 in ten different FTSE 100 holdings and think the market is due to turn and come down instead of selling all your stocks you can lock in the value buy selling the FTSE Index.
You profit from your FTSE spread bet to compensation for your portfolio devaluation. Of course, this is not totally accurate as some stocks have a heavier weighting on the market than others, but it gives some rough coverage.
- Pros – protect your portfolio tax-free if the market drops
- Cons – index overnight funding charges can add up
Currency spread betting hedging
If you have a big foreign currency purchase coming up and want to lock in a good FX rate you can use spread betting for this in the short term. Just place a bet equivalent to the opposite exposure of the FX pair and lock in your price.
- Pros – reduce currency risk
- Cons – potentially complicated to manage and maintain
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Richard started the Good Broker Guide in 2015 and has been a broker for 20 years most recently at Investors Intelligence and previously a multi-asset derivatives broker at MF Global (Man Financial). Richard started his career working as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson) after interning on the NYMEX oil trading floor in New York and London IPE in 2001 & 2000.