August 30, 2007

Limited Risk Spread Bet

Limiting spread betting losses

There are two main ways of limiting spread betting losses. One is a stop loss order. This is when you instruct the indexation company to exit your position at a certain level. However, there is no guaranty that the stop loss will be fulfilled in time. The other other way is a limited risk spread bet.

Limited risk spread bet

In this mode of limiting spread betting losses, your indexation company refigures where your bet will be closed out. It offers a guaranty unavailable through a stop loss order. Incademy explains how a limited risk spread bet works:

Suppose you think that Nasdaq is going to rise in the next quarter and you find a spread quote of 3,170 - 3,220.
You don't want to lose more than £1,000 so you ask for a controlled risk bet. The indexation company takes the middle figure in its spread (3,195 in this case), deducts its controlled risk spread - say 18 points - and offers a buy price of 3,177. That's the price you bet at.
If your stake was £10 per point, your losses will hit £1,000 if the spread descends to 3077. This would be 100 points off your buy price of 3177.
Under the terms of the controlled risk, the indexation company will automatically close out your bet when the spread reaches 3077. You will owe £1,000, but you will at least be protected from the consequences of further falls in the Nasdaq.