Explanation of Hedging of Spread Betting Account

In my last post when I mentioned about "hedging accounts" against each other I would like to clarify what I meant since I have a request to explain it in more detail.

Firstly, I have an account with more than one spreadbetting company.

For example with  my SpreadEx account and my ETX Capital account I can open positions which are directly opposite to each other.

E.g Long (Buy) FTSE on my SpreadEx account for £1 per point.

On the ETX Capital Account I can Short (Short) FTSE for £1 per point.

This means that as the market moves now, the two positions are now "cancelling" each other out to the extent that the only difference should be due to the "Spread" ie the fact there is a difference for the Bid/Offer price if both are executed at the same time. This is what causes there to be a profit overall for a spread betting company assuming they themselves are fully hedged.

So in order to exploit ETX Capital offer they are offering a refund of £250 on all losses in the account.

So I can either open up positions as above hoping to lose £250 in the “ETX Capital” account, assuming the ftse moves following “random walk theory”.

For example if the FTSE moved up by 250 points I would lose £250 in that account and gain £250 in the SpreadEx account.

Or

If the FTSE moved down by 250 points I would gain £250 in the ETX account and lose £250 in the SpreadEx account.

However assuming that both outcomes are equally likely there is only a 50% chance that I will profit for £250 due to refund only being on losses.

So one technique I have used to make use of this expected value of £250:

Long (Buy) FTSE on my SpreadEx account for £1 per point.

On the ETX Capital Account I can Short (Short) FTSE for £2 per point.

If the FTSE moved down by 125 points I would gain £250 in the ETX account and lose £125 in the SpreadEx account giving £125 profit overall.

Or

For example if the FTSE moved up by 125 points I would lose £250 in the ETX account and gain £125 in the SpreadEx account.

In this case I am relying on the refund being given in that I am currently -£125 until the refund comes in and I am up £125.

Variations of this are possible but this one works for me and I feel it is an appropriate risk levels me to undertake.