Differential Spread Bets

Differential Spread Bets

Which Companies Offer Differential Spread Bets?

Differential spread bets are available with the following spread betting companies:

although note that differentials may also be offered by other firms.

Introduction to Differential Spread Bets

First thing’s first, what are differential spread bets?

A differential spread betting market relates to the difference between two other financial markets, such as the difference between the values of the UK’s FTSE index and the German DAX index.

So if, for example, the FTSE 100 and the DAX 30 were priced at 5910 and 7374 respectively then the difference would be 1464.

Importantly, differentials are futures markets which can expire on either a monthly or quarterly basis and, in this case, the indices prices quoted above are for the June futures markets.

Therefore, you might see a FTSE – DAX (June) Differential market of 1462.0 – 1466.0 from a spread betting company like Financial Spreads.

This would mean that you could spread bet on:

  • The FTSE – DAX differential to finish higher than 1466.0 on the closing date, or
  • The FTSE – DAX differential to finish lower than 1462.0 on the closing date.
Betting on the differential to rise would imply that you thought that the DAX index was going to provide a better return than its UK counterpart, whereas betting on the differential to fall would imply the opposite position.

A few key differential spread betting markets are:

  • The FTSE – DAX differential
  • The Brent Crude Oil – US Crude Oil differential
  • The FTSE/Dow Jones differential
Ultimately differential spread bets are the same as creating two opposing trades, i.e. speculating on one of them to rise and the other one to fall, however there are a couple of key advantages over holding two separate positions.

Firstly, a single differential spread bet normally offers a tighter spread than two separate trades.

Secondly, only having one trade makes managing your whole position simpler; it is easier to open/close your trade, place your trading orders and check your profit and loss.

How to Spread Bet on Differential Markets

At the moment, the DAX index is trading at 7374 and the FTSE index is at 5910.

As a result, the price of the “FTSE/DAX (June) Differential” market is currently 1462.0 – 1466.0 with FinancialSpreads.

Like many financial markets, you can place a spread bet on the future price of the FTSE/DAX differential to rise or fall in value. With this FTSE/DAX (June) Differential market, which closes on 17-Jun-11, an investor can bet on:

  1. The FTSE/DAX differential to close above 1466.0 on the expiry date, i.e. the DAX will outperform the FTSE, or
  2. The FTSE/DAX differential to close below 1462.0 on the expiry date, i.e. the FTSE will outperform the DAX.
It should be noted that with the FTSE/DAX differential market you trade in £X per point, where a point is 1.0 points of FTSE/DAX differential movement.

As a brief example, if you were to invest £4 per point and the FTSE/DAX market moved by 8.0 points then your bottom line would change by £32.

FTSE/DAX Differential Spread Betting Example

Let’s assume you see the price of 1462.0 – 1466.0 and, following your research of the indices markets, you could think that the FTSE/DAX differential should rise and close higher than 1466.0. This would mean:

  1. You believe that the DAX will outperform the FTSE and so the FTSE/DAX differential will go up
  2. You decide you want to ‘buy’ the market at 1466.0 and you risk £3 per point
  3. The DAX performs more strongly than the FTSE and so the differential rises
  4. You decide to allow your bet to run to the closing date of 17-Jun-11
  5. The differential market then settles at 1510.0
  6. You initially bought the spread bet at 1466.0
  7. P&L = (Final Price – Initial Price) x stake
  8. P&L = (1510.0 – 1466.0) x £3 per point
  9. P&L = 44.0 x £3 per point
  10. P&L = £132.00 profit
Spread bets don’t always go to plan. If the two underlying indices had failed to move as forecast, with the FTSE performing better than the DAX, then the FTSE/DAX differential may have decreased, settling at a lower than expected level of 1425.5. In this case you would have made a loss rather than a profit.

  1. You bought the spread bet at 1466.0
  2. P&L = (Final Price – Initial Price) x stake
  3. P&L = (1425.5 – 1466.0) x £3 per point
  4. P&L = -40.5 x £3 per point
  5. P&L = -£121.50 loss
(FTSE/DAX (June) Differential spread betting market quoted as of 05-May-11)

User Questions and Answers on Differential Trading

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