Stop the pain and protect profits

SPECULATING in huge amounts with margin products such as spread bets is a bit like highwire acrobatics. One sudden lurch and you can be falling headlong towards the circus ring.

Fortunately, there is a way of cushioning the fall - a guaranteed stop. It is a product unique to spread betting, and a valuable one, but its deployment also requires careful judgment.

Its protective qualities were in use when one punter went £10m short of the FTSE 100 index via a spread bet with IG Index, on 8 November.

One of the biggest trades this year, it took the form of a £2000-apoint down-bet on the December Footsie from an opening level of 5240. The client arranged with IG to have a guaranteed stop at 5340. This meant that if the market went the wrong way, IG would close the bet at 5340 - so there was no way the customer could lose more than 100 points (5340 minus 5240), or £200,000.

Luckily for the trader, the stock market tumbled on 12 November in the wake of the US air crash and he was able to close the bet at 5130, pocketing a profit of £220,000 (110 times £2000).

However, if he had failed to take his profits at that point, he would have been caught by the Footsie's subsequent spurt. Last Wednesday, the guaranteed stop level of 5340 would have been hit, and the bet automatically closed.

The best thing about guaranteed stops is that, no matter how sharply the market moves, the bookmaker is obliged to close the bet at the level it has agreed. So in the case above, if the Footsie had suddenly leapt 300 points to 5500 without stopping in between, the customer would still have got out at 5340.

Stops are not cost-free. IG and other bookmakers charge three extra points on their FTSE spreads in return for a stop. So if I wanted to make an upbet on the December Footsie, from yesterday's spread of 5332-5342, then my starting level would be 5345, not 5342. On a £5-a-point bet, that would equate to a cost of £15.

They can also be quite tricky to use. Say I went ahead with that up-bet from 5345, and arranged a guaranteed stop at 5300, then any temporary blip in the Footsie - caused perhaps by one large programme trade - could trigger the stop.

That would leave me with losses of 45 points and I might have to watch helplessly as the index climbed in the direction I had originally expected. The answer is to set the stop sufficiently far away from your opening level - in the case of a bet on the FTSE 100, this would be at least 100 points and perhaps 150.

The other trick is to adjust the stop if your bet moves significantly into profit. It can then become a protector of profit, rather than a limiter of losses.

Politicians face football match

HAPPILY for those political spread betting enthusiasts starved of opportunities since the end of the Tory leadership race in September, a by-election is coming up in Ipswich on Thursday.

The seat was won by Labour in May with an 8081 majority over the Conservatives. The by-election is a battle between three candidates with four-letter surnames - Chris Mole for Labour, Paul West for the Tories and Tessa Munt for the Liberal Democrats.

Yesterday, bookmaker Financial Spreads was quoting Labour to win 2700-3300 more votes than the Tories, and a turnout of 25%-28%, down from 57% in May.

Tory leader Iain Duncan Smith and Liberal democrat leader Charles Kennedy have visited the constituency, but voters seem more interested in Ipswich Town's UEFA Cup football game against Internazionale of Milan, also tomorrow.

Anyone expecting more than 28% to vote could make an up-bet from there, risking perhaps £5 for each percentage point. A 20% turnout would bring losses of £40 (eight times £5) but a 40% turnout would result in profits of £60 (12 times £5).

Financial Spreads was yesterday quoting John Ramirez, of the Legalise Cannabis Alliance, to win 280-330 votes.