This post is not so much about a spread betting strategy but an indicator that can be used to predict when the markets (share markets) will turn. The VIX index AKA the Fear Guage is a good indicator to use when spread betting shares. At present the markets are getting quite frothy, rampant even. The reasons for this include the massive injections of money into financial systems in the western world. It has given some people watching the markets ‘the shivers’, as quoted by Alan Abelson on Barron’s.

So what’s the VIX index and how can it be used for spread betting

Share markets are often said to be driven by fear and greed. It’s comes down to crowd psychology where there’s an event that makes everyone either greedy and wanting to invest buy more, or fearful of the future causing ‘the crowd’ to sell like crazy.

The VIX index measures expected volatility in markets by using clever algorithms based on the options market. In basic terms options can be used as a form of insurance by professional investors against a large drop in the market.

How can the VIX index be used as part of a spread betting strategy?

Spread betting relies on market volatility. Share prices must be moving either up or down for a spread trade to become profitable. As an gauge of expected volatility the VIX index is great at indicating when market will turn. Not exactly when, but it’s enough to focus the attention. Combined with traditional and simple spread trading techniques such as looking a price charts, simple moving averages and volume of shares traded it forms a powerful indicator.

A low reading on the VIX index is an indication of calm in the markets. What spread traders watch out for is a sharp reversal in the index. This would foretell a sudden change in sentiment which is a high probability indicator that markets will drop. Quickly and by large amounts. A high reading indicators significant fear in the market and normally accompanies lows points in the market.

how can the VIX index help with financial spread betting

Financial spread betting without orders would be very risky indeed. You may have noticed this message all over spread betting company websites “Spread betting, CFDs and FX are leveraged products and carry a high level of risk to your capital. It is possible to lose more than your initial investment. These products may not be suitable for all investors, therefore ensure you understand the risks involved and seek independent advice if necessary.” It’s worth comparing the spread betting order so that the risks can be reduced and the rewards amplified. Orders are triggered automatically so the trader doesn’t even need to be there. Let alone worry about the risk.

The word leverage here, means that the value of the bet can be worth more than the amount actually staked. It has a similar meaning when a company borrows money to boost profits. The company uses leverage. Spread betting works in a similar why. Say you decide to spread bet the FTSE 100. You buy the market at 1£ per point. The market rises 10 points by the end of the day. At the close of trading your spread bet will be worth £10. If you close your bet you will get nearly a £10 profit for only a £1 stake. That’s leverage. Of course it works the same the other way. It’s not only profits that get magnified it’s loses too: a reason why spread betting can carry a ‘high level of risk’. This leads us nicely to the point of spread betting orders.

compare spread betting orders

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.

example of a rolling spread bet