Spread Betting Risk Management - Guaranteed & Ordinary Stops

LONDON, February 16, 2012 /PRNewswire/ --

The choice facing many in spread betting when it comes to assessing risk is whether they should pay a premium to guarantee a stop order attached to an open position.

Before we answer this let's remind ourselves of the difference between the two.  An ordinary stop order such as the automatic mandatory ones that are attached to every single open position at Capital Spreads, are subject to market gapping or slippage.

Imagine you bought £100 per point of Vodafone at 170.0 and your automatic stop loss was set at 160.0.  Should Vodafone issue a profit warning overnight and the stock opens at 150.0 the following morning your stop order would be filled at 150.0 - not at 160.0 as requested, because of the slippage in price.  Gapping like this can occur during normal market hours too and across all different markets.

If on the other hand you had paid to turn your automatic stop order into a guaranteed stop order, you would have been filled at the requested level of 160.0.  The cost of guaranteeing your automatic stop loss for UK 100 equities is 0.50%, so in this instance a cost of £85 ([170.0 x £100] x 0.50%).  It might seem an expensive charge but, in the example above, you would have saved yourself the additional £1000 loss caused by being slipped to 150.0.

There are other specifics you need to be aware of when deciding whether or not to guarantee your stop order, such as the minimum distance they have to be left away from the current market price.  Also, there are maximum limits to the stake size that Capital Spreads will accept for a guaranteed stops order.

On the whole we see few clients who intraday trade using guaranteed stop orders and it's rare that during market hours you'll see a market such as an index or FX pair experience slippage.  But this doesn't mean it doesn't happen and there's a high likelihood that a gap will occur if something unexpected happens or a major piece of economic data, such as the non-farm payroll, surprises significantly to the downside or upside.

Where clients tend to use guaranteed orders more is if they are leaving a position open overnight or trading an individual stock. As the Vodafone example shows, stocks can be subject to big moves when they open - either higher if, for example, they are subject to a takeover bid or lower if they warn on their profits.

So for the extra premium you're getting extra protection, just like an insurance policy.  It is up to you to weigh up whether it's worth the risk of just sticking with the automatic stop order or whether you should pay the cost for extra peace of mind.  

While LCG attempts to ensure that the information herein is accurate at the date the information was produced, however, LCG does not guarantee the accuracy, timeliness, completeness, performance or fitness for a particular purpose of any of the information provided herein and under no circumstances are they to be considered an offer, solicitation to invest or be construed as giving investment advice.

Capital Spreads is a trading name of London Capital Group, which is authorised and regulated by the Financial Services Authority and a member of the London Stock Exchange. Registered Address: 2nd floor, 6 Devonshire Square, London, EC2M 4AB. Registered Number: 3218125.