As a kid, my dad took me to the bowling alley a few times. He bowled on a team with a guy that as a kid reminded me of a great big bear, except that he was happy, friendly, and generally lots of fun. My dad worked with him in the IT industry until he left to take his hand at trading futures. Turns out he was very good at it and is now a very successful, highly thought of trader.
I’ve always been intrigued by some of the high risk, high rewards trading options out there. Things like futures trading, derivatives, and even options are things that I’ve taken the time to learn about, but just don’t have the risk tolerance or available capital to trade with. While my dad’s friend was willing to take a chance and it paid off handsomely, I know it’s just not for me.
But, the intrigue factor is enough that I’ve learned some of the basics about each of the trading strategies above.
So when I heard about a trading option called ‘spread betting‘, I was immediately taken and had to do a little more research. Obviously, if we’ve gotten to the point where ‘betting’ is part of the title of the trading strategy, you know it’s not for the faint of heart.
Turns out it’s not. This is a strategy, that as far as I could tell, is available in the UK and is pretty much trading options on markets, currencies, individual stocks or indexes, and other financial insturments. Say you believe a market is going to go up. You’d ‘buy’ the current
by Casey Serin, on Flickr
bid price of the market. If it goes up as you expect, your trade wins, and it can win big, because trading in spreads is highly leveraged. You’re not buying actual shares of anything, you’re basically just buying the ups and downs.
So, if the trade goes your way, you can win big depending on how much you’re leveraged.
The obvious risk is that if the trade doesn’t go your way, you can lose and lose big. Say you think a particular index is going up. If it goes down instead, you could lose everything very quickly. Stop loss orders are critical to ensure that you don’t lose everything, or even worse, end up busting through your margins.
As I said, this is only for people who have the capital to risk and who truly understand the nuances of the markets. As I get most of my investing advice from Yahoo Finance or other type of news feeds, I know that I don’t have anywhere near the level of information that others trading do.
But, man, it’s fun to dream. Meanwhile, I think I’ll drop my dad’s friend a line and see what he thinks of spread betting.