Spread trade on FTSE 100, Selling Indices through Financial Spread Trading
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The FTSE 100 dropped 4% on Thursday - the biggest daily drop since March 2003. By the end of play the FTSE 100 closed at 5,858.9 breaking the all important 6,000 barrier and hitting its lowest level since Sept 2006. So far the market is down 6% in 2007.
Mining and Finance stocks were the worst hit. Invescomm HSBC, Barclays, RBS and HBOS all finished lower whilst Standard Chartered lost 7.6% and Man Group lost 8.3%.
Given that Man is the world's largest listed Hedge Fund group the drop is not a surprise. It's felt that Man Group has plenty of exposure to the problems in the US Subprime Market.
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Although the markets stabilised on Friday many think the markets will drop again this week. If you think that's the case then one option is spread trading on the FTSE 100 to go down.
At the moment the FTSE (Sept) market stands at 6,176 - 6,180.
As with many markets, traders can financial spread bet the future value of Indices. For example spread betting on the FTSE (Sept) market going below 6,176 by 21-Sep-07 (the closing date of this market).
With the FTSE price, you trade in £X per point, where a point is 1 point of FTSE movement. For example if your stake was £8 per point and the FTSE moves 4 points then that would be a £32 difference to your bottom line.
So let's say you think that the FTSE (Sept) will finish at less then 6,176.
Therefore you sell at 6,176 for a stake of £4 per point.
And so let's say that by the closing date of 21-Sep-07 the FTSE 100 finishes at 6,120.
Then your P&L is calculated by taking the difference between the price you sold at, ie 6,176 and the settlement level of 6,120 and then multiplying that by the stake.
profit/loss = (6,176 - 6,120) x £4 per point stake.
= 56 x £4 per point stake.
= £224 profit.
Some traders feel that in the current climate that FTSE 100 is worth sticking with. Investors may seek the safety of blue chip stocks. With a record price/earnings ratio of 10.9 last week there may be more value here than the mid-caps of the FTSE 250.
So if you placed the above trade but the large Funds had resorted to the safety of the FTSE 100, the FTSE (Sept) could have risen against you and finished at a higher at 6,220. If so, you would have made a loss.
Loss = (6,176 - 6,220) x £4 per point stake.
= -44 x £4 per point stake.
= -£176 loss.
'Selling the FTSE 100 with Spread Betting' by DB, updated 20-Aug-07
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