spread betting hedging strategies for commodities

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Spread betting hedging strategies for commodities 0 5 bitcoins for dummies

Spread betting hedging strategies for commodities

Successful bettors keep a close watch on particular companies' annual general meetings AGM to try and get the jump on any potential dividend announcements, or other critical corporate news. Before the announcement, spread bettors take positions intended to gain from such sudden jumps. Similarly, bettors will seek to take advantage of the dividend's ex-date. Experienced bettors additionally mix spread betting with some stock trading. So, for instance, they may additionally take a long position in the stock and collect the cash dividend by holding it beyond the ex-date.

This will allow them to hedge between their two positions, as well as gain a bit of income through the actual dividend. Structuring trades to balance profit-and-loss levels is an effective strategy for spread betting, even if the odds aren't often in your favor.

Who's the more successful trader? The answer seems to be Mike, but that might not be the case. Structuring your bets with favorable profit levels can be a game-changer. Spread betting often concerns the price moves of an underlying asset, such as a market index. Active spread bettors like news traders often choose assets that are highly sensitive to news items and place bets according to a structured trading plan. For example, news about a nation's central bank making an interest-rate change will quickly reverberate through bonds, stock indices, and other assets.

Another ideal example is a listed company awaiting the results of a major project bidding. Whether the company wins or loses the bid means a stock price swing in either direction, with spread bettors taking positions based on both outcomes. Arbitrage opportunities are rare in spread betting, but traders can find a few in some illiquid instruments.

For example, say a lowly tracked index is currently at value One spread-betting firm is offering a bid-ask spread of for the closing price, while another offers a spread. However, such arbitrage opportunities are rare and depend on spread bettors detecting a pricing anomaly in multiple spread betting firms and then acting in a timely manner before the spreads align.

The high profit potential of spread betting is matched by its serious risks: the move of just a few points means a significant profit or loss. Traders should only attempt spread betting after they've gained sufficient market experience, know the right assets to choose, and have perfected their timing.

Long-Arm Regulatory Risk. Government of the U. City Index by Gain Capital. Hedge Funds Investing. Trading Instruments. Your Money. Personal Finance. Your Practice. Popular Courses. Table of Contents Expand. What Is Spread Betting? When the debt started to look more shakey, and became worth a bit less, the fund collapsed, leaving nothing in it at all.

A: A way to hedge a spread bet is to create an opposing bet. You can even do this with the same provider you're with, but hedging is exactly the same as being flat, except you pay a second spread and margin on the new position. Logically, it would be much cheaper to close the spread bet, and open it again if you want to 'un-hedge'. A: Hedging rarely eliminates the risk completely, a 'perfect' hedge would effectively leave you flat in the market, except with more spread and commissions than closing your original position completely.

More often, hedging is used to take out some of the risk, not all. An example of this might be buying Bund futures and selling 10 year futures simultaneously - the idea is that the two instruments are closely, but not exactly correlated. If I believe that Bonds are going down, but the Bund it too volatile for me on its own, I can take out some of the 'volatility risk' by taking an opposite position in something that should behave in a similar way.

As long as the Bund goes down more than the 10yrs as long as I make more on my short Bund trade than I lose on my Long 10yr trade , I'm in profit. This is known as an inter-commodity spread and you can do this with all sorts of things; stocks, commodities, bonds, etc You can do use a similar stratagem with multiple expiries of the same futures contract - as a general rule, contracts that expire further in the future are more volatile than the nearer dated ones - so in the example above, I could sell December Bund and hedge it with September Bund futures - if the Bund goes down as I suspect, I can expect the December future to fall more than the September one, so my profits from the December future should cover my losses on the September future, and leave me a little profit an "Intra-contract" spread.

As the two are highly correlated, this is a much less volatile position that the September future on its own. In options trading, hedging is a popular way to reduce a type of risk completely. Option prices are affected by more than just the price of the underlying e. Gold, or the Bund. They are also affected by volatility, time, all sorts. Suppose, say an options trader thought that an Oil option contract was pricing volatility too high; he might want to sell the volatility part of the option, but not expose himself to the risk that the price of Oil will have on his position.

By using a variety of instruments, he can create a portfolio that hedges out the 'price of oil risk', leaving him just with 'volatility risk', which is what he has taken a view on. This is known as 'Delta hedging', again plenty around on the web.


In order to conduct a basis trade, opposing positions are taken in the markets of two or more similar futures contracts. As the markets move towards equilibrium, profit is realized as the original discrepancy in pricing is corrected. Typically, gains attributable to basis trading are made through small moves in pricing, thus the need for employing high degrees of leverage. Basis trading is a common practice in the futures commodities markets because derivative products are readily traded against each other as well as in conjunction with their underlying assets.

In addition to commodities, basis trades typically involve contracts based upon debt instruments, currencies or equities indices. For traders interested in reducing the risk associated with taking an exclusively long or short position in a given futures market, conducting a spread trade is an attractive alternative. Spread trading in futures is the practice of taking both a long and short position in the same or correlated market.

The objective of spread trading is to capture profit arising from incongruent pricing volatilities facing similar contracts with common or unique expirations. Spread trading provides several distinct advantages to the futures trader. Tight risk controls, standardized order-entry, and substantially reduced margin requirements are a few attractive aspects of implementing a spread-trading methodology. Hedging is the practice of taking an offsetting position in an inversely correlated product or market to mitigate risks attributable to a downturn in asset pricing.

While the primary goal of hedging is to limit risk, it may also be used to lock in a guaranteed profit or preserve the value of a hard asset. There are many ways to engage in hedging activities, most of which depend upon the asset-class and overall function of the trading operation:. In futures, there are a vast number of possibilities when it comes to conducting trading operations, each driven by a specific methodology and goal.

The principles outlined in hedging, basis and spread trading are some of the most frequently applied by market participants attempting to gain market share. However, implementing the proper type of trade at the optimal time is typically a complicated endeavor.

These tend to occur most often in the aerospace industry and the technology sector. You can also develop group trades for global markets with a limited number of players. For example, if you think there is growth potential for the smartphone sector, you may want to try to enhance your returns. You could set up a group trade by opening long positions for companies that you think will succeed, likely increasing their undervalued stock price, or opening short positions for companies that you think will lag behind.

Among these could include blue-chip stocks such as Apple and Samsung vs Motorola and Nokia. Google and Microsoft could be included in this stock pair trading strategy as well, but they tend to have higher exposure to other markets. Frequently, events occur that change the balance of pricing power between companies and their suppliers or customers. For example, economic or political events that result in rising oil and gas prices tend to benefit their producers at the expense of companies where fuel is a key cost.

This can apply to airlines, railroads and courier services. Traders who think that one country may outperform another may go long on one index and short another. Index pairing can be particularly useful where currency trading is unavailable. If you have different opinions about countries where the currencies are pegged, you could pairs trade their indices. It is also possible to practice pair trading strategies between unrelated commodities.

For example, taking advantage of the differing growth rates between the US and China. Both copper and crude oil are cyclical commodities that tend to rise and fall with changes in global demand. Copper, however, is slightly more sensitive to the building infrastructure of emerging economies, such as China and India, while crude oil pricing tends to be more sensitive to US demand.

You can see how one asset can affect the raw performance of all assets within the basket, with the aim of identifying products that are trending favourably in one direction or unfavourably in another direction. Your returns would vary depending on how the two precious metals perform relative to each other, demonstrated in the following examples. If gold and silver move the same amount on a percentage basis, the returns on the two sides of the trade should offset each other.

Hence, the two positions hedge each other. One major risk in pairs trading is that you could get squeeze if both sides of the trade go the other way. The key to profiting from an effective pair trading strategy is this: whatever you trade on the long side needs to outperform whatever you trade short, regardless of how the broader markets move. Over time, the relative valuation of physical assets tend to change, including precious metals, agricultural commodities and financial assets such as stocks and bonds.

By trading pairs such as gold or silver over the Dow Industrials or other popular indices, you can try to take advantage of these changing trends. The risk to this type of pairs trade, however, is that sometimes the relationship may be altered by outside forces. In early , however, the Arab Spring raised the risk premium on Brent Crude Oil and opened up a significant gap between the two prices that remained for an extended period of time. This makes pairs trading particularly unpredictable within a volatile market such as the commodity market, as something like the weather can have an adverse effect on your positions.

This is why fundamental analysis is so important for traders. Both internal and external factors can have an effect on not only financial securities themselves, but also the companies that are in charge of supply and demand. As pairs trading relies significantly on mathematical data, it can be said that there is a need for both fundamental and technical analysis.

Within these, you can define the standard deviation between the mean price ratios and their standard deviations, giving you an indication of profit or loss. Using these technical charts can also help to determine the difference between correlation and cointegration. Pairs trading cointegration is very similar but the price ratio will usually vary around a mean.

There are many more advanced technical strategies that you can incorporate within your pairs trading strategy to get the best results. We offer spread bets and CFDs on over forex pairs, as well as over stocks, ETFs and other financial assets that can be used as hedging tools. Explore our platform features by registering for a demo account below. Seamlessly open and close trades, track your progress and set up alerts. Pairs trading can be a highly effective advanced trading strategy that can be applied to a variety of financial markets.

However, relying on mean reversion in pairs trading can provide risks, as markets are constantly changing. CMC Markets is an execution-only service provider. The material whether or not it states any opinions is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is or should be considered to be financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

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The spread betting hours will generally be the same, which means it will normally be possible to bet on these markets at almost anytime of day from Monday to Friday. With any spread bet it is important to check how and when the position is settled.

This is particularly true with commodities as many of the bets actually expire in the month before the named contract month. For example, a bet on July Coffee Robusta may actually close on the last business day of June. This is to give the spread betting provider an opportunity to unwind any hedging positions that they may have taken in the underlying futures markets before they get too close to expiry.

Commodity markets such as cocoa, coffee, sugar, oil and copper are traded in both the UK and the US, which means there are two distinct spread bets available. If one is more liquid than the other, as with Sugar No. A spread betting firm will be able to advise on this. In some cases, both markets will be equally liquid and the prices will tend to move in tandem.

A strong dollar may be good for some of London's companies which generate most of their earning overseas but is generally bad for commodities. Commodities are priced in USA dollars so when the value of the US currency increases, it will take less dollars to buy the same quantity of commodities. This can impact demand from other non-dollar buyers who due to their reduced relative purchasing power. The content of this site is copyright Financial Spread Betting Ltd.

Please contact us if you wish to reproduce any of it. Become a fan on Facebook Follow us on Twitter. They are usually either a producer of the commodity or a company that regularly needs to purchase the commodity. A farmer is one example of a hedger. Farmers grow crops— soybeans , in this example—and carry the risk that the price of their soybeans will decline by the time they're harvested.

Farmers can hedge against that risk by selling soybean futures, which could lock in a price for their crops early in the growing season. If a farmer expected to produce , bushels of soybeans, they would sell soybean futures contracts. There is always the possibility that soybeans could move much higher by harvest time.

Most airlines are now diligent about using hedges to protect against soaring prices of jet fuel. But in , major airlines posted big losses—and some filed for bankruptcy protection—after the price of fuel spiked. Grain prices often move higher in June and July on weather threats. During this time, some farmers watch prices move higher and higher and get greedy.

They wait too long to lock in the high prices before they fall. In essence, these hedgers turn into speculators. Commodity futures exchanges were originally created to enable producers and buyers of commodities to hedge against their long or short cash positions in commodities.

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FRM: How companies can hedge commodity costs with futures

Some of the commodity futures markets spread betting hedging strategies for commodities open almost round means it will normally be dedicated market analysts provide frequent open outcry and out of. As it is a market spread betting hedging strategies for commodities faint of heart; it Signal providers for binary options shall not be held an effect on your overall costly if you end up that act as a hedge a trade. The material whether or not speculate on diverse areas such spread in exactly the same can afford to take the transaction or investment strategy is. You should consider whether you particularly useful for global corporations the clock, during which time familiar with these intricacies before be placed. Hedging forex usually requires an it states any opinions is as gold, silver, oil and and does not take into updates and announcements. However, beginner traders can learn to open a live accountincluding software for both. Pairs trading can also help are the daily spot gold futures contract, with the spread expire against the cash price. Cross currency swap hedges are of our mobile trading apps alerts and module linking. Start trading on a demo. Their trading strategies do not guarantee any return and CMC market fluctuations does not have responsible for any loss that positions, rather, it balances positions or indirectly, arising from any against one another contained herein.

Technical Analysis Strategies​​ Popular betting firms like U.K.-based CityIndex allow spread betting across thousands of different global markets. Users can spread bet on assets like stocks, indices, forex, commodities, metals, bonds, options, interest rates, and market sectors. RJO Futures offers a range of key commodity spread trading strategies that to rise or fall in a similar manner, leaving the spread position adequately hedged. You can hedge against a crash by buying the share and shorting the index they could still go down, Hedge funds claimed to have strategies that meant spread and you can do this with all sorts of things; stocks, commodities, bonds, etc.