Fixed and variable spreads in spread betting
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In spread betting the spread is the difference between the bid and the ask price of an option. This can either be fixed at a certain value or determined by the market conditions. Whether you want a fixed or a variable spread will depend on how you intend to trade. It is always important before beginning to trade in either ways that there is a strong financial spread betting education in place.
Regardless of which type of spread you choose, your object as a trader should be to ensure that the spread when you trade an option is as narrow as possible. The gap between the bid and the ask price is the amount of money that is captured by the spread betting provider. By putting up with wider spreads than necessary you will earn less money than if you had picked an optimal spread.
With variable spreads the spread tends to be narrower than fixed spreads most of the time. However, when liquidity is reduced, for example following a major market moving announcement, the variable spread will widen. This generally won’t be a problem for traders who want to maintain their position for the long term as they will be able to wait until the spread narrows.
For active traders who are seeking to trade on news announcements or scalp, the widening of the spread could end up having a serious impact on their profits. The solution in most cases for people who are pursuing active, short term strategies is to secure a fixed spread so that they know what price they can sell at regardless of the liquidity of the market.
Fixed spreads are a good idea for traders who are spread betting on more obscure options. These include currency pairs outside of the big six and non-FTSE 100 companies.
If you are wagering large sums on an option then the spread won’t make that much of a difference to your profits. In this case other features of spread betting providers might be more important in helping you to decide with which you should trade.
A further advantage of fixed spreads is that they eliminate slippage. This is when you attempt to close a position at a certain price, or a stop loss order comes into play, and you end up closing at a lower or higher price than you expected because there was no-one for your provider to sell your position to. This has the potential to wipe out any profits you might have made or amplify losses.