What to do if no rolling cash available?

[jls483]

Let's say I wanted to use deal4free to take a long term punt on the price of oil.

Imagine it is currently at $23/barrel and I want to buy a few contracts and sell it at $33/barrel. This might not happen for seven months.

Unfortunately deal4free does not have a rolling cash option for oil prices, it currently only has Jun 03 and Jul 03 rolling monthly bets.

These monthly bets are currently priced at $25 and $31 (real prices now). How should I play this to make sure that I make $10 a contract when the price eventually rises by ten dollars?

Is it possible? Let us imagine that my June bet was expiring today at $25. I would have made $2, but when I take out a new bet on the July contract it is only available at $31 and $6 would have disappeared into the ether. (I hope I have completely misunderstood this).

Is the difference between a monthly rolling bet and the actual price almost fixed during the life of the bet? For example if I had a bet that was about to expire which I was hoping to get $6 more out of, could I just take out the same number of contracts in the next months bet and add $6 to the current price of the next months bet whatever that makes. Presumably over time things would average out.

Would things be simpler if I was using futures rather than spreadbets?

Any insight gratefully received. Thanks,

John.

 

[mmillar]

John,

The first rule of spreadbetting is 'buy the future, sell the cash'. You should never buy a 'cash' or 'rolling cash' product from a spreadbetter if you intend to hold overnight. If you do you will pay them daily interest which very quickly works out much higher then the extra spread for buying a future. To hold a 'cash' product for seven months would probably require a remortgaging of your house!!

Have you tried phoning D4F and asking them for a Quarterly contract on oil? The head trader is Brian Griffin and his sidekick is Jeff Langham. Speak to these guys and see what they say. If enough people ask D4F tend to be helpful about adding new contracts/instruments (look at Eurostox50).

The problem you're describing with the rollover of contracts is just a standard problem anyone has with buying over the long term. One way around it is to buy/sell shares in oil companies. I'm sure there are others (maybe options?). Someone will know.

Some spreadbet companies let you rollover into new contract months cheaper then selling the old quarter and buying the new. Again, you should phone D4F and ask them for a price. Compare it with other SB's because D4F is not always better in this regard.

And as usual, futures and spreadbets are the same thing, so you will have the same issues if you switch to a direct futures broker.

Cheers

mmillar

 

[jls483]

MMillar thanks for your feedback.

I'm still trying to work out the exact difference between futures and spreadbets - so please bare with me.

I don't think the spreadbet financing charge is that bad. I think with d4f it is about 6% a year. I've tried to invent a scenario where in my limited knowledge using a spreadbet might be a good idea - if you could tell me a better way with futures - I'd be interested to hear it.

I'm an investor not a day trader and the stock market is at 3500. I believe that at some point in the future - probably within the next ten years, but hopefully in the next few days it will rise to 4000. I have £35,000 to invest. It actually takes six months for the FTSE to rise to 4000.

Using traditional methods I buy 10,000 i-share ftse 100 at £3.50 each and I sell them six months later for £4 making a profit of £5,000.

Using d4free. I take the risk that the FTSE will not fall below 2625 and buy 40 contracts. I sell these contracts six months later and make £20,000 tax free. Over the six months I will have paid about £4,500 in interest charges making a profit of about £15,500.

Please don't worry too much about things that can go wrong with my suggestion, e.g. it takes ten years to get to 4000 - I know about them and have ways of dealing it, but I have tried to keep my example simple.

So - could I use futures instead? I need an instrument whose price difference to the underlying index does not vary over time - so I think options are out.

Regarding your other comments: I could use an oil company, but I think there is more risk to an oil company going bust due to an insurance or accounting scandal than there is the oil price dropping to zero or rising to infinity.

 

[Gary777]

Hi John

Interesting idea you have there, but aren't you trying to use short term trading instruments for long term investment? Sounds pretty risky.

The only instrument I can think of that matches the underlying index price regardless of time is an ISA Tracker?

Maybe £30K in the tracker fund and do some shorter term trading in the direction of the current trend with the other £5K using basic TA with stop losses.

I don't think that actually paying a spread firm 6% interest for the right to keep open a long term losing spreadbet (if the bear market continued), could be considered a good idea.

Good luck anyway.

 

[mmillar]

Hi,

I'm certainly not going to 'bare' with you (I'm a married man) though I will be happy to bear with you. I'm sure you have read the many posts on spreadbetting vs direct access futures brokers so I wont bore you with it here.

£4,500 in overnight financing :!: Now, instead of buying a 'rolling cash' you buy a future. You pay an extra point or two on the initial spread and then, after 3 months, a 'spread' for rolling into the next contract, which you can hold for another 3 months. Which is cheaper? I don't trade oil but I think it would be difficult for the rollover spread to get to £4,500.

I honestly don't know a way of holding a position for months or years without buying real shares. With spreadbets/futures you need to roll your position every three months. You can buy 'far futures' but I have no experience of this and I suspect the spread and risk would be terrible.

Sorry I can't be of more help but I'm sure someone else will have some good ideas.

Cheers

mmillar

 

[fastnet]

I'm not sure why the rolling cash bets are getting such a bad press - I was v glad to see them appear. It saved me opening a CFD account with the large min. positions that come with them.

As far as I can see (and I am open to correction) these are basically a CFD equivalent. Okay the spreads might not quite be as good but with no min bet size it's an excellent way to SB the FTSE shares.

Let's face it you are at a huge disadvantage spread betting with the SB companies - if you ever did make any money then you would have made MUCH more with a CFD provider.

i) The spreads are massive except for the GSK's of this world. Even then they're still pretty large as a proportion of price.

ii) The spreads open and shut like . .. . well never mind what like but the spread size is VERY inconsistent and depends on the bookies nerve and volatility.

iii) Certain FTSE 100 companies appear and disappear from one day to the next. Looked for a LLOY price on Finspreads recently?

iv) The bookies mess about with the spread to favour the likely direction of movement. Can't fault them for this - it's part of the business but don't confuse the share future price with the market price.

NOW - where CFD's and (I think) rolling cash bets have an advantage . . .

i) Much smaller spreads than the share futures

ii) Price is based on actual underlying market price. There might be a spread larger than Barclays Stockbrokers or whoever but at least you're paying the actual going rate.

iii) Excellent margin. Much better than buying underlying share.

As for the moaning about paying an interest rate on long positions this is because, like CFDs, the SB company is basically financing your margined purchase. i.e., you are enjoying the benefit of the effect of a £10 long position, say, and it's cost you £1K in margin. They've stumped up the rest.

And remember - they pay you if you sell short. . . . albeit at a lower rate. . .

I was thoroughly pleased with this new option (beats usual FTSE share bets hands down) and it saved me the hassle and expense of opening a grown-up CFD account. . .

Cheers

 

[jls483]

fastnet. I use deal4free spreadbet FTSE 100 which has a fixed spread of 3 during market opening hours and no commissions. Ideal for the large number of low contract deals that I do. The deal4free spreadbet offerings are identical to their CFD offerings - same terms exactly.

mmillar. Sorry about the baring request! I think you have hit the nail on the head. I need to compare the cost of the interest against the cost of moving the bets every three months. Perhaps on average the moving costs would average to zero over time ...? I think I would also need to calculate the effects of the future price slowly converging to the price of the underlying index/share. I presume this happens or is the difference fixed? IS there a way of plotting the FTSE future and the real FTSE on the same graph?

I'm new to the boards so I haven't read all of the spreadbets v future discussions - but I think I can guess what most of it is about.

Gary777 - it would be risky if my example was all I did - but don't worry I have a little scheme going which removes the risk. BTW a better solution than a tracker would be a exchange traded fund like i-shares FTSE-100.

Thanks for all your suggestions.

John.

 

[mmillar]

John,

Yes, the time value of futures erode over time and, in theory at least, they should expire at the same price as the 'cash'. When you roll to the next quarter, the new future will have time value again which is what will cost you. You're right about taking the time value into account when calculating the cost of a future, but I think it is quite complex and is certainly way beyond my knowledge.

Cheers and good luck.

mmillar

 

[jls483]

Dear mmillar,

I've just spent many a happy hour at advfn comparing the price of the FTSE to the LIFFE:ZM3 and LIFFE:ZU3 and it seems that the future price does track the underlying index very closely and "passes on" all of the volatitlity that I am looking to trade.

I decided to take a look at Interactive Brokers then to see how I would go about trading the FTSE future and I am told by them, I presumably correctly, that there is no concept of margin with futures, so in the example I gave the maths would look like this:

[Please note, I now know that this was not correct so you can irngore the rest of this - sorry]

With my £35,000 buy 10 future contracts at 3,500 each, sell them when the FTSE rises to 4,000 and make a profit of £5,000 a lot less than I would have made with the spreadbet scenario.

So unless I have misunderstood things it would appear that under the scenario I gave the best instrument to use would be a spreadbet which would give me £15,500 tax free.

JonnyT perhaps you should change your signature to - Futures are for mugs! (under some scenarios).

I still don't know enough about options to know whether they could be (ab)used for some long term investing - any suggestions?

I would like to propose that in any (long term) investment strategy that makes a return greater than the margin charge of the spreadbetter (about 6%) then your returns could be improved using spreadbets and taking advantage of the margin. How much you can gear up will depend on how much risk you are prepared to take of going bust. In my example, I was prepared to risk going bust if the FTSE fell 25% to 2625 and by doing some was able to quadruple my returns. I was able to change a return of 30.6% into a return of 122.4%-14.2%=108.18%. (once the interest had been subtracted).

Now all we have to do is find an investment strategy which "guarantees" returns of more than 6%!

John.

 

[Gary777]

I think you need to speak to someone else at IB. There is very much a concept of margin when trading futures!

I believe you only need £1875 of initial margin to trade one FTSE contract intraday with IB and £3750 to hold overnight positions. They have a table of margin requirements somewhere on their website for all the products they trade.

FTSE futures are priced at £10 a point, not £1 by the way.

 

[JonnyT]

10 FTSE contracts at 3500 would give a profit of 500 x £10 = £5000 per contact. Therefor with 10 contacts your profit would be £50,000

JonnyT

 

[jls483]

JonnyT - sorry I didn't know that FTSE futures were ten pounds a point. Anyway as gary777 points out - I was misinformed so my whole argument was a load of baloney. I'll keep looking at futures!

John.