Hedging Our Family Bets

Continuing my read-through of The Naked Trader’s Guide to Spread Betting (as I first mentioned here), I not so long ago read the section containing Robbie’s description of how spread betting companies hedge (or not) your bets in order to control their own exposure and risk. he makes the points that:

  • If you’re a good trader and you go long, the spread betting company might go long with you by buying an equivalent number of shares in the market.
  • If you’re a bad trader and you go short, the spread betting company might theoretically — but maybe not actually — bet in the opposite direction by buying shares in the market.
The point is that your bet is with the spread betting company (acting like a bookie) rather than with the market, and they can choose whether or not they hedge your bet in the market. In an ideal world, the spread betting company would have an equal number of long buyers and short sellers of each stock (or index, or whatever) so that it had no net exposure that needed hedging at all. They would be taking no risk and would pick up the bid-ask spreads when the opposing positions were closed — plus the differential between the interest charged on the long positions compared with the interest paid out (we wish) on the short positions.
I was prompted to write this posting not only because I had just read the relevant section on hedging in The Naked Trader’s Guide to Spread Betting, but also because of something my daughter said to me this morning.:
“Hey dad, I just banked £17 from a long position in Britvic*”
* coincidentally, Britvic was also the subject of my original posting.
Upon hearing my daughter say this, I thought to myself “Ah, that’ll be the same £17 that I’ve lost by trying to go short on the same stock then!”
It seems we did the spread betting company (which was Capital Spreads, I think) a favour by taking opposite sides of the same trade within our family. Except that my daughter’s trade was a demo trade, so it doesn’t count.

Disclaimer: this posting is for general education only; it is not trading advice.