Spreadbetting to hedge share investment?

[Slim]

I'm thinking of investing €10k in Irish shares, mainly some of the banks. I have read that I can hedge this somewhat by spreadbetting with a bookie. How does this work in practice? How much would I have to risk to protect my investment from a 10% drop?

Thanks in advance,

Slim

 

[dunkamania]

If you bought €10k of Bank of Ireland at €9.30 you would have 1075 shares. If you subsequently initiated a short spreadbet on Bank of ireland, betting €10.75 on each cent of decline in share price, you will be left hedged.

Price rises to €9.50, stock is worth €10,212.5 but you owe €215 on your spread betting account.
Price drops to €9.10, stock is worth €9,782.5 but you are up €215 on your spread betting account.

While you have these two positions on, you arent affected by price movements, but you lose out on charges.Realistically, doing this makes sense only if, you are putting in the hedge for short periods of time, otherwise dont buy the stock in the first place.
You would typically have to post 10% margin on the spreadbet.

 

[Slim]

Hi Dunkamania, Thanks for replying to my query. Can you clarify for me:

If you subsequently initiated a short spreadbet on Bank of ireland,

What do you mean by "short"?

betting €10.75 on each cent of decline in share price, you will be left hedged.

why do you select €10.75?

You would typically have to post 10% margin on the spreadbet

Do you mean I would have to stump up €21.50 when it's down €215? Does the bet continue until I close it out?

Sorry for the dumb questions.

Slim

 

[bfield]

What do you mean by "short"?

Going short means betting that the price will fall. so if you buy 10k worth of shares, and then "go short" with your spreadbet, you are effectively hedged as Dunkamania has explained.

why do you select €10.75?

in the example above, you have 1075 shares. to hedge against this you need to stake a bet for every cent, so 1075/100 = €10.75.

Do you mean I would have to stump up €21.50 when it's down €215? Does the bet continue until I close it out?

No. The 10% magin referred to is the inital margin/sum you need to deposit to cover a 10% loss. in this example you need to deposit funds to cover a 10% increase in price ie. €0.93, which at €10.75 for every cent means initally lodging €999.75. If the price continues to rise, you will be asked to lodge more money or else close your position and take the loss on the spreadbet. i maybe wrong in this last bit, so maybe dunkamania can confirm.

BTW, i've just started investigating spreadbetting myself and am not an expert, so im open to correction on the above comments.

hope that helps.

 

[z106]

Could you provide a bit more information?

From what you are saying, it seems the simple answer would be to invest only part of the 10k in equities and look for a cash return (deposit) on the rest.

Investing 10k and then hedging, say, half the exposure is the same as investing €5k and putting €5k in the bank. Except you don't pay the spread.

I'd go along with that.

It's a bit like putting a tenner heads to win - and putting a fiver down on harps to hedge your bet.

Why not just put a fiver down on heads day one and let that be it.

Not identical mind you as i guess if you did it thropugh a spreadbetting firm you'd get the exposure of a fiver on harps for only say, 50 cents.

That said - you may well have to deal with margin calls and have to put in more.

 

[Slim]

Thanks for all your replies. I am trying to understand the basics of it all. I do not think it is for me.

Again thanks all.

Slim

 

[dunkamania]

Going short means betting that the price will fall. so if you buy 10k worth of shares, and then "go short" with your spreadbet, you are effectively hedged as Dunkamania has explained.

Spot on.

If you are looking for a hedge that would allow you to keep the upside while limiting your downside, you would be talking about buying a put option as weel as your shares. The put option allows you to sell the shares at a predetermined price at a certain date in the future, and becomes more valuable as the share price drops. Not one for novices, as the pricing can be ifficult to understand.

Looking back at the strategy brought up by the OP, the main reason to do this would be tax based, ie you bought AIB shares at €4, you think they are going to drop but if you sell then you have to realise your tax liability, and you want to buy them again.By hedging with the spreadbet you lock in the value of your position without paying the tax, removing the hedge when you think they will go back up.