Day Trading: Using Spread Betting to Hedge Current Positions

Hedging positions is key to the strategies of many hedge funds as it allows them to protect against market movements as they can profit, or reduce losses, if the market moves either way. This means that the performance of their portfolio closer reflects the quality of their individual stock or commodities picks, as opposed to market movements in general, and this is particularly useful in times of market volatility.

Hedging simply means holding a position that will increase in value if another in your portfolio decreases in value. So one example may be hedging a position in an oil company by shorting oil. If the price of oil is high the oil company is likely to do well, and if the price of oil falls you gain from shorting it, but a good company will fall less than a bad one if the oil price falls so overall you should profit, but also reduce your risk. Another example could be holding an index tracker such as for the FTSE 100 at the same time as holding gold, which tends to fall when people feel there is lots of risk and sell equities.

However many people feel that these strategies are only available to hedge funds, or at least those with lots of capital to invest. Whilst this is true for traditional forms of hedging, spread betting allows private investors to participate with less capital.

Spread betting allows users to buy and sell a range of assets that may otherwise be unavailable to them. These include commodities such as gold and oil as well currencies and equities. Using a spread betting account therefore allows private investors to limit their risk and increase their profitability without requiring huge amounts of capital.

There are additional advantages to using spread betting as well. These include lower tax than traditional investing, lower dealing costs for short or medium term holdings and access to a wider range of assets.

All this means that it is particularly useful for short periods of time. So if you hold an index tracker and think that they next few days, weeks, or months are going to be volatile, instead of selling and sitting on your cash you can profit by hedging your positions. This is particularly effective if you use hedging as a short-term way to limit risk to a long-term portfolio, as you would not have sold anyway but still manage to profit from volatility.

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