Hedging is another strategy that you can employ using spread bets. We’ve all heard about hedge funds, and they’re called that because they are allowed to do most anything that’s legal in the financial markets – but hedging specifically is a way of protecting your financial position by betting against it, and as such is a sophisticated technique. It’s not necessarily going to help you win at spread betting, but it could help you save some money, which after all is similar to winning.
Suppose your long-term investments included some shares that you were convinced were a good prospect for the long haul, but would suffer a correction soon. You could just sell the shares, and buy them back when the price dropped, you would think. But then you would be paying stamp duty, commission charges for both transactions, and quite possibly capital gains tax. Suppose there was a way to avoid the loss, but not pay all those things?
Having read this far, you can hopefully see where this is going. You can use your spread trading expertise to hedge against the fall in value. You would simply place a down bet for an equivalent amount to cover your potential losses on the shares. Your cost for this would be the spread, which you would be out if you were wrong and the shares didn’t fall in value, but that’s the cost of your “insurance” bet. Otherwise, you would smile happily as the shares lost value, knowing that what you lost on your shareholding was being compensated by gains on your spread bet.
You should set this bet up in the usual way, setting a stop loss to trigger if you were wrong and the shares went up instead of falling. It would be a pity to let the losses run wild on the bet, even though they would be covered by gains in the share value, as effectively you would have given your gains away (and still have to pay capital gains tax on them when you sold).