Not all good things have to come to an end. Well, so quickly any way. You can extend the life of a spread bet with a rolling it over. Spread bets are either daily, or are based on the expiry dates of futures contracts. But, a spread bet doesn’t normally last longer than a few months at best.
If you have a winning trade which is gathering momentum you’ll hardly want to close the trade early. Or, if you’ve got a losing trade which you’re certain will reduce in size or even turn positive there’s no point in closing when you can reduce or eliminate the loss.
This post will examine a rolling share bet to highlight what a rolling spread bet is. This has been reinforced using some examples. Finally the post explains some of the advantages of a roll over spread bet.
What is a rolling share bet?
Rolling share bets, or daily share bets, mirror the underlying share price and include a small spread that is a percentage of the share price. A rolling share bet is a daily bet that can be automatically rolled over to the next trading day. This involves closing and re-opening the bet at the day’s official mid-close for the share (unless the bet is closed naturally). The rollover is actioned at around 16:30 hrs for UK shares and around 21:00 hrs for US shares; the bet will continue to roll automatically and indefinitely if funding is available in your trading account.
You can also spread bet futures contracts, typically futures contacts are dated every three months. Spread betting rolling contracts gives your trade a ‘time value’. You have time for the price of the underlying asset to appreciate or depreciate depending on whether you have traded long or short. You may also choose to roll over these bets so as to give yourself more time to profit from your trade.
A rolling share trade example
It is 9.30 hrs on Tuesday and the current share price of Marks & Spencer, including the 0.5p market spread, is 346 – 346.5. Therefore the spread betting company’s spread for Marks & Spender rolling is
You think the M&S share price is set to fall in the very near future and decide to sell M&S rolling at 345.7p for £10 per point. In place of a normal spread, you will be paid interest for every day that you hold a position open.
The interest payable by spread betting companies varies for rolling share positions and is normally based on the London Inter Bank Offered Rate (LIBOR). This is the interest rate offered by a specific group of London banks for U.S. dollar deposits of a stated maturity.
As such, interest may well be calculated as follows:
(LIBOR 1 month – 2%)/365 x the total underlying value of your position.
So in this case, assuming LIBOR 1 month is 5%, the daily interest payable would be:
((5% – 2%)/365) x (£10 x 345.7) = 0.0082% x 345.7p = 28p.
You think the M&S share price is set to rise in the very near future and decide to buy M&S rolling at 346.8p for £10 per point. In place of a normal spread, you will be charged interest for every day that you hold a position open.
(The interest payable by you on a rolling share position is normally:
(LIBOR 1 month + 1.5%)/365 x the total underlying value of your position.
(So in this case, assuming LIBOR 1 month is 5%, the interest payable would be:
((5% + 1.5%)/365) x (£10 x 346.8) = 0.0178% x 346.8p = 62p.
It is now 16:30 hrs on Tuesday, the M&P share price hasn’t moved far during the day and closes with a mid-point of 351p. As you haven’t closed your position earlier in the day, it should be automatically rolled over to the next trading day.
As a seller of M&S, you have (incorrectly predicted the share price will fall. Your original position is closed at the official (mid-close of the share (351), which results in a (loss of £53 ((351 – 345.7) x £10). Your selling position is then reopened for the next trading day at the mid-price of 351p for the same stake (£10).
As a buyer of M&S, you have correctly predicted that the share price will rise. Your original position is closed at the (official mid-close of the share (351), which results in a (profit of £42 ((351 – 346.8) x £10). Your buying position is then re-opened for the next trading day at the mid-price (351p) for the same stake (£10).
You were right to rollover your positon. The share price has moved in your direction and you make a profit of £132, the difference between the new buying price (337.8p) and Tuesday’s selling price (351p) multiplied by your stake (£10).
You were wrong to rollover your position. The share price has moved against you and you lose £143, the difference between the new selling price (336.7p) and Tuesday’s buying price (351p) multiplied by your stake (£10).
Advantages of rolling share spread bets
Daily bets are specifically designed for the short-term trader. If you intend to run a position for only a short period, a rolling share bet has significant advantages over a quarterly bet:
The dealing spread is significantly narrower, roughly 40% cheaper than the spread for the corresponding quarterly bet. But, the advantage of this depends on your trading method and where you place your stop loss.
Quarterly bets will trade at a future premium or discount depending on the markets. The daily quote is based on the cash price of the share so you don’t need to worry about any forward premium or discount.
There is no expiry date attributable to rolling cash bets. Hence if you wish to keep such a position open for the medium term, say 12 months, then there is no need for you to roll over the position at each quarterly expiry; the rolling bet normally just runs on and on until you close it.
Interest is actually payable to you for down bets/short positions. So the longer you keep the position open, the more you are paid! However, in today’s economy of lower interest rate, such credits may not be significant.