In this section we talk about trading the stock indexes; namely spread betting the FTSE 100. At this point in the spread betting guide you now have all the basic information needed to consider making your first few trades! The next step is to consider which financial market or markets you are going to spread bet in from amongst the many available.
Established in the UK in 1984, the FTSE indexes have become the barometer of the UK stock market. Within this, the FTSE 100 Index has proved to be the most popular amongst private investors. When you bet on the value of this index you are betting on whether the combined share prices of 100 top companies, weighted according to their size, will rise or fall. Stock index future contracts, as the name suggests, is the art of predicting the level of the underlying index on a specified date in the future. Bets cover quarters of the year expiring on the third Friday of the month in March, June, September and December.
How To Trade Stock Index Futures
This market is probably the easiest to trade in, and one of the easier ones to predict. Here is an example of how you might bet on it :
In April you notice that there is confidence in the markets and expect them to move up for the next few weeks. So, the contract you will trade for this particular example will be June, the next quarterly betting period.
You telephone the trader for a quote on the June FTSE 100. Now, because you are looking at what price the FTSE will be in two months time or so, the price that the dealer quotes you will be nowhere near the current FTSE market price. Usually the future has a natural premium called a ‘fair value premium’ to the underlying index; this depends on how optimistic or pessimistic investors are about future trends.
Going back to our example, the dealer quotes 5715-5725. The actual market is currently trading at 5680. You expect the FTSE price to rise quite significantly and so buy at 5725 for let’s say £10.00 a point – your stake.
You always buy at the top figure the dealer quotes and sell at the lowest figure. The difference, or spread, between the two quoted figures represents the profit margin for the financial bookmaker.
As you predicted, the markets rise and at the contract expiry date in June the FTSE 100 Index stands at 5947. You bought at 5725 for £10 a point and so you have made a profit of :
- Bought at 5725
- Increase of 222 points
- Sold at 5947
- You have multiplied your £10 stake to £2,220!
What is an Up Bet ?
There are numerous terms for an up bet like ‘long’, ‘going long’, ‘buy’ etc.
Placing an up bet simply means you expect prices to finish higher than the figure quoted by the financial bookmaker. It doesn’t mean you actually buy the stocks.
For Example: BT reports good profits and the markets react favourably. You expect the FTSE to rise throughout the day. So you ask the dealer the current price of the daily FTSE.
He quotes 5672-5680. The FTSE is currently trading at 5670 which means the trader expects the price to only rise a further 10 points maximum but finishing between 5672 and 5680. You feel the figure of 5680 is too low and expect the FTSE to rise even further. So for this example you say to the dealer ‘can I buy at £5 per point at 5670’. This means that you will receive £5 for every point over 5680 when the FTSE finally closes at the end of that day.
What is a Down Bet?
Other names for a down bet are ‘short’, ‘shorting’ and ‘sell’ – they all mean the same thing whether you are trading the FTSE or any other index. Placing a down bet simply means that you expect the eventual price of a market to be lower than the figure quoted by the financial bookmaker.
For Example: Markets in the Far East suffer overnight and you expect the UK markets to react. At 8.00am you ask the bookmaker for a quote on the Daily FTSE. Because the markets have yet to begin trading, the bookmaker gives you a quote of 6105-6113. The FTSE closed at 6121 the day before.
This means the bookmaker expects the FTSE to fall at the close of the day somewhere between 6105 and 6113. For our example you expect prices to fall much further and so you say you want to sell at £10 a point at 6105 – if the FTSE finishes lower than 6105 you receive £10 for every point lower.
Trading During The Life Of A Contract
Going back to our example, just because you hold a position on the June FTSE 100, you don’t necessarily have to wait until June, when it naturally expires, to close the bet. You can close it whenever you wish. You may decide to take a quick profit and close the contract within a week of opening it.
The original price quoted for the June expiry date will change on a daily basis. This will be due to responses from movements in the underlying FTSE Index and differing views on future prospects. If you trade longer contracts you must keep an eye on market movements frequently. This will enable you to close a trade whenever you feel the time is right to take a profit or reduce losses.
The June price quoted was 5715-5725. In the example you bought at 5725. Unfortunately you misread the markets and the FTSE 100 begins to fall. By the end of April the FTSE stands at 5649. It may rise, or it may continue falling. You decide to close the position preventing any future losses. The dealer quotes 5652-5662 for the June price. To close a position, you simply place a second bet of equal size in the opposite direction of your original opening bet. Having bought at £10 a point at 5725, you need to sell at 5652 at £10 a point.
Your loss is : 5725 – 5652 = 73 x £10. Total loss = £730.
How To Trade On The Daily FTSE 100 Index
You can also bet on the value of the FTSE 100 on a daily basis. When trading daily, you need to be more certain of how the markets are going to behave. But it’s an ideal opportunity for you to make a steady daily profit and when you take five days into account, you can make a healthy profit each week. Generally, daily trading is also more suitable if you intend to use large stakes since the fall and rise of the index is likely to be much less than over a quarterly period.
When speaking to the dealer, you simply ask for their current price of the ‘Daily FTSE 100’. Remember that in this case the market is quoted from 9.00am, the opening time, to 4.30pm, which is the official closing time.
Here is an example of how you might bet on the Daily FTSE 100 :
You telephone the trader at 10.30am and ask for a quote for the Daily FTSE Index. He tells you it’s 5422-5430 which simply means if you feel the markets will fall throughout the day you place a down bet (sell) at 5422. If you feel the markets will rise you place an up bet (buy) at 5430. For our example, the Bank of England announces a rise in interest rates. This news usually has a damaging effect on share prices and you fully expect share prices falling throughout the day.
You tell the trader that you want to sell at £50 per point – this means that for every point below 5422 the FTSE falls you make £50. Your predictions were correct and the FTSE has fallen to 5379 by 2.15pm. At this stage you are showing a profit of £2,150.00. At 2.30pm Wall Street begins trading and depending on activity in the US, there could be further action with UK share prices.
You now have two choices: You could either close your trade and pocket the profit or you could keep it open in the hope that share prices continue falling which will earn you £50 per point fall. If share prices on Wall Street rise, UK share prices may start to make up losses and your profit could disappear within minutes.
You decide to take the cautious route and close your trade while the FTSE stands at 5379. When you call back the dealer, they will quote you a different price to what the FTSE is currently standing at. This price will depend on how the bookmaker feels the markets will act for the rest of the day. The dealer quotes 5374-5382. To close a trade you need to place an identical bet in the opposite direction to your first bet. So you tell the dealer that you wish to buy at 5382 at £50 per point and then you say that this is to close a trade.
From this you receive : 5422 – 5382 = 40. 40 x £50 = £2,000.00 !
If, however, you decided not to close the trade and allowed it to stand throughout the day until close of markets at 4.30pm, you would receive the difference between the price you got when opening the trade which was 5422 and the final closing price of the FTSE which, for example, was 5388.
If you did this, your profit would have been somewhat different :
5422 – 5388 = 34. 34 x £50 = £1,700.00.
You can see with this example that very quick profits can be made from dealing. Obviously, if the markets went against you then you would have finished the day at a loss. My advice would be to steadily build up a ‘bank’ and if you do incur any losses, it won’t effect you too much. However, with the information and help contained within this book, you will be experiencing very few losing trades.
I personally know a colleague of mine who deals full-time. He will only trade the Daily FTSE 100 share index and makes about £20,000 per week. He stakes around £500 per point but closes a trade very quickly – he sets himself a target of £4,000 profit from each trade. From this the FTSE only needs to move 8 points in his favour. He is very strict with himself and as soon as his target has been reached – he pulls out even though he could have made a few more thousand throughout the day. It’s a superb system and he lives an extremely comfortable life-style. Some days his target of £4,000 is reached by 9.15am – leaving him the rest of the day to enjoy himself!
Advantages and Disadvantages Between Daily and Longer Contract Trading
When trading the FTSE index on a daily basis you need to be fairly sure of your expectancies of how the markets will trade. This is not to say you shouldn’t trade daily, as mentioned earlier, you can make large profits very quickly – usually within a matter of hours and can close a trade straight away if the markets are not going the way you expected. With longer contracts you don’t have to be correct straight away. You may expect the markets to rise within the next few weeks and so go long on the FTSE. Soon after you’ve bought a contract the markets fall but you are not too concerned because the markets have another six weeks to turn around. Gradually share prices rise and eventually you are in profit. At the close of the contract you made a good profit although earlier in the contract’s life you were showing a loss.
Consider this example : Imagine that a quote for September FTSE is 5280-5290. You buy at £20 per point at 5290. Within days share prices fall and the FTSE stands at 5170 showing a loss of £2,400. Gradually share prices rise and in late August the FTSE stands at 5322. At the end of the contract’s life the FTSE is at 5407 and you end up with a profit of :
5407-5290 = 117. 117x £20 makes a profit of £2,340.00. Your profit is £2,340.00 even though you were, at one point, showing a loss of £2,400!
Other Indexes You Can Trade
The FTSE also offers the financial spread trader a range of other options. You can spread bet on these depending on the bookmaker in question. For example, you might consider the FTSE 250 index which incorporates the share values of 250 top companies, thus giving a broader spread of the market, the FTSE 350, the FTSE All Share Index which incorporates the values of all listed companies. Because these give a broader spread they are likely to be less volatile and so less risky but potentially less profitable. You can also bet on sectoral indexes, which incorporate the values of shares of all companies in a particular type of industry. These are worth considering if you have a particular inside knowledge of the industry in question. Your bookmaker will provide you with details of the indexes upon which they accept bets.
Clever Strategy: My advice would be to trade the Daily FTSE with small amounts of either £5 or £10 per point until you build up profits. Then, trade longer contracts but make sure you place a stop-loss order on your early trades until you gain more confidence in trading.