Two (2) of the most popular strategies that many investors and traders employ when it comes to financial spread betting are the arbitrage and portfolio hedging. It is in this regard that this article will explain these aspects briefly, most especially to those people who are just beginning to explore this field.
Arbitrage as Betting Strategy
This is one of the first and old-fashioned strategies that is not only applicable in spread betting, but in other financial transactions as well. The general definition of this refers to the practice that most investors do in order to take advantage of the different in the price between at least two (2) markets. In a more technical sense, what happens here is that a trader strikes a combination of deals in order to capitalize on the market imbalance.
Now, applying this concept to financial spread betting, a trader needs to start with its premise. In this market, companies set their spreads. However, there might be a chance when one may set a distinct or different spread than the rest.
In this instance, if this happens, then a trader would be able to profit by way of both buying and selling these two (2) trades against one another.
However, the sad part here is that since there are so many improvements in the aspects collaboration and communication among the different spread betting companies, this chance seldom occurs.
Spread Betting and Portfolio Hedging
On the other hand, another strategy that traders can explore and employ in this field is portfolio hedging. As its name suggests, this is about reducing the exposure of a position to investment risks.
However, this is not a strategy to prevent a negative or adverse impact from happening. Instead, what this strategy does in a spread betting position is to minimize the effect or impact of any risk.
Nevertheless, this is not for free. As a matter of fact, it comes with a price. It may not be in monetary terms, but in qualitative forms. What this means is that that protecting a spread betting position will entail limiting an investment portfolio. Hence, while it limits a position’s exposure from risks, it also limits earnings and profits.
In other words, portfolio hedging is also a form of offsetting possible loss and gains. For instance, if investors are worrying about the price swings in a stock in the short-run, what they can do is to simply purchase the same amount of stocks in put options. By doing that, a trader is able to hedge the same stock portfolio against any losses in the short-run.
With the foregoing, it may show that portfolio hedging may not be applicable all the time when it comes to financial spread betting. This is because it may not matter for investors working in the “buy and hold” model.
