13 Jul 2011, 8:00pm
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  • Spreadbetting Sharesave, Riding with the Devil…

    One of the benefits of working for a big FTSE100 company is they do sharesave schemes. I’ve never understood why anybody doesn’t do sharesave if they’re offered it, but less than half seem to. You get to save up to £250 a month from taxed income, and get the option to buy shares either three or five years in the future. The option price is set at the price at the start of the scheme, usually with a small discount on the current share price.

    Now these are optional options, mind you, so you don’t have to buy them at the off, but you have the right to take them. That’s not like any share options you normally buy. If the SP of your company has gone down the toilet over the 3 or 5 years, well, let the options lapse, and instead take the cash you’ve saved and go on holiday/buy a flat panel TV/stick it in an ISA/buy the shares of your company or another on the open market if you like.

    There is absolutely nothing not to like about sharesave. But what you mustn’t do with the buggers is look at the sharesave account screen and start thinking what you’ll spend the money on. Because you ain’t got it till the options mature and you take them (or not). So I keep ribbing a colleague who has already decided what he’s going to spend it on, ‘cos these suckers have got another year to run.  Believing you’ve got it now is like the poor saps that start to think about spending the winnings from their Lottery ticket before they’ve actually won them.

    The SP has gone up about three times the option price. That time two years ago was a dark day for the company. I dropped every single previously running sharesave contract to hit that one which the full £250 per month, even at the same time as I was wondering if I could stick some of the nasty practices any more. It’s not like betting on red, if I left early I collect the cash savings plan, so no big deal. Sharesave is like that, the worst that could happen is you get your money back ;) Compared to anything else to do with shares, that’s pretty damn good.

    Don’t count your chickens…unless you can lock the suckers in

    My colleague sets me off thinking. The SP is three times higher than at the start. I would be happy with that, what if I were to lock in that price? I’ve had the prior experience of things looking great only for it all to go pear-shaped by the maturity date. Generally Joe Public can’t sell shares they haven’t got, well not for only £15k worth of shares. However, there is a shady part of the financial market called spread betting that lets mere mortals short shares. What if I use spread betting to lock in the current SP?

    My favoured financial spreadbet company is IGIndex, because I understand their system. Hey, I’ve lost money with them before :) The advantage of expensive education is you get to remember what went wrong.

    I cocked up massively at an earlier date using spread betting, through coming up with some byzantine approach to try and measure the value of the SB options, and getting the tracking wrong. There was no need for all that complication. The way to look at it is I hold options on 7,535 shares. If a share moves a point it goes up by 1p. IG options go up by £1. So I need to sell 7535/100 = 75 options to cover my real holding of buy options. I then need to cover the margin.

    This sort of game sterilises a lot of cash if the SP rises a lot. I have enough to cover a fair change in the SP, and my company is an elephant, in a mature industry, so it will probably not gallop. So if I cover a 2x margin I will probably be okay. I’m only protecting 1/4 of my options to start off with, so if this elephant starts to gallop I’m still in the money (by 3/4 of what I would otherwise have gained relative to now, less the spreadbet spread). I should be so lucky. On the other hand if it tanks then I’ve locked in the tripling in value for 1/4 of the stake, minus the spreadbet spread. If I haven’t screwed up, I can’t lose, subject to the force majeure conditions later.

    The trouble with spread betting is you are dealing with spivs

    Spreadbetting isn’t real, like Contracts for Difference. Spreadbetting is effectively playing inside a model of the stockmarket set up by IG Index. It has to bear some resemblance to the stock market to be credible, but there are traps for the unwary in terms of short-term spikes and distortions at times of market stress. I need to have enough margin that for IG not to feel they could get away with forcing me out. There is no recourse or process of appeal.

    IG Index are basically spivs. The clue’s in the name – spread betting. The trouble with dealing with spivs is you get spivvy behaviour. They’re as crafty as they can be without being provably dishonest. I wasn’t aware of their fun and games with spiking people out beforehand, and as a timid spreadbetter I was tossed out on earlier forays. At an unnecessary loss, natch.

    So I’m only protecting 1/4 of my option holdings, and have a very high cash holding relative to the difference I am expecting.  That isn’t how you’re meant to use spread betting – it is sold to the impecunious as a way of leveraging up.

    That’s not true, and it fails you when you need it most, so neophyte punters get margin called and eaten for breakfast. It seems if you haven’t got a cash holding with them that would be equivalent to the cost of the equivalent shareholding on the stock market, (covering a fall to zero for call or a doubling in SP for put options) they’ll have the opportunity to close your position on spikes. I’m reducing my exposure by only covering 25% of my holdings as I can only take a position until March which I would need to rollover at some cost to get to Sept 2012.

    I will see how it goes with this before covering any more, ideally with a spreadbet reaching to September 2012 in one go. If the current spreadbet works okay for the next quarter (i.e. the change is what I expect, it doesn’t have to be positive) I will consider protecting another quarter of the holding, effectively freezing my gains progressively; pound cost averaging in reverse.

    SB firms have a bad reputation (thanks to the anon poster who educated me to this) for putting spikes in their data so people that use stop-losses get spiked out and their positions closed. So I need to take an unprotected position – I have the stock assets to cover it in my options, so the only way I get kicked out is with a margin call. I need to front load the account with enough cash to cover a notional 2x increase in SP.

    Having understood my previous cock-up and been warmed up to the shady tricks used by IG to trip up over-fearful punters with narrow margins/stoplosses I’m up for it. The fundamentals of what I’m trying to do are sound. However, it’s unusual – most spreadbetters are trying to make money from trades without underlying assets to back up the trade.

    What could go wrong? Force majeure for starters…

    If I lose my job before next August and the SP has risen I lose the options and get to eat the crow on the spreadbets. If the company takes an external unforeseen hit then the SP usually tanks, think News International. However, if the company management announce redundancies the SP usually goes up, because stock markets hate employees in the way vampires hate garlic :(

    Likewise if there is a bid for the company the SP goes up, though the pension scheme issues with my company probably make it toxic enough for that to be unlikely at the moment. I’m prepared to take these risks, let’s face it if redundancies are on offer then I will be first in line for voluntary redundancy The pension scheme means compulsory redundancy is expensive, the firm has never gone that way yet, though there are other ways of ejecting people without making them redundant. I’ll eat the loss on the spreadbets without too much remorse in that case.

    Dividend payments are taken from the account on the ex-dividend date for sell options. In theory this should be offset by the corresponding fall in the SP which boosts the value of the sell option. I will experience this at least once. The divi has been declared, so I know how much this is and consider this the price of insurance.

    A Faustian pact with spivs is never going to be easy

    In the end hedging is never going to be easy, it’s counter-intuitive and a spreadbet is inherently leveraged as you’re focusing on the difference in SP rather than the total SP, so it’s easy to bite off more than you can chew.  I can afford to lose the entire stake, though it won’t make my day, it would nearly wipe out my entire ISA gains this year.

    If that happens I’ll take the lesson, and actually close this spreadbetting account and accept I haven’t got the smarts to use it properly. Assuming, that is, that I don’t find out that I fundamentally failed to understand how to track my sharesave options with the spreadbet. If it’s my bad I don’t mind paying for education, though I’ve double checked this time :)

    I’d like to find a decent solution to the hedging conundrum. It’s particularly valuable for sharesave, and it would have been great to have found a hedging solution in years gone by. I’m also sitting on a stack of Share Incentive Plan shares which I have to hold for another four years to retain the tax advantages. It would be nice to lock these suckers into the current share price without selling and eating a 40% hit.

    Why not Contracts For Difference?

    On the face of it CFDs look like a better approach. However, I’ve opened a demo CFD account with my ISA provider, iii, and there appear to be significant commission and financing costs for a year’s worth CFD. For a short trade the finance charge seems to be in my favour, but III in their own literature say that CFDs tend to be shorter term holdings.

    Daley says that, ultimately, choosing between a CFD and a spreadbet tends to come down to personal preference: “People tend to go for one or the other. If they like CFDs, they don’t like spreadbetting, and vice versa. Overall, CFDs tend to be used for slightly shorter intra-day trading or for perhaps two to three days.”

    Plus there’s a £35 per month (!) inactivity fee on their CFD platform. So in this case it’s better the bunch of spivs that I know…

     

     

    Makes my leveraged income experiment look extremely simple. Which it is, since USA interest rates are so low.

    Wow, I’ve read this twice and still don’t know what you’re doing.

    I opened a CFC demo account with iii a couple of weeks ago and promptly lost 5000 fake pounds on shorting gold and some exchange rate contracts. iii ring me every couple of days now to try to get me to take up a real account. They’re pretty good at spotting suckers! Plus the £35 / month is an absolute ripoff in this day just for holding an account.

    Good luck.

    @George – leveraged income does it work? I haven’t got the bottle to chance that myself!

    @fatherb I have the advantage here of having a claim on the assets I am shorting, and that the value of that claim is currently about 3x what I will pay for the claim if I exercise it. So shorting the way down from an option that is already is in the money locks in the current value of the option.

    CFDs and spreadbetting does take a lot of getting your head round, because they’re very counter-intuitive. Spreadbetting in particular is working in a model of the real world that doesn’t track temporal fine details, and has traps for the unwary, particularly if you set narrow stoplosses.

    However, so far the spreadbetting account is working okay. The price of my company shares has fallen, and the SB account has gone up by a shade less than 1/4 of the total amount my option shares have fallen. I have no stoploss on that position, because the value of the real shares are my protection. So IG can’t spike me out easily.

    @ermine – so far the leveraged income has been working okay, but USA interest rates are extremely low. I’m borrowing at an effective rate of 2.5% and the shares I’ve bought for this experiment have an average yield around 9%. My net yield on the investment, going forward, is around 12% (unless the crash happens).

    You can follow progress at http://forum.earlyretirementextreme.com/topic.php?id=975

    Hmm, that average yield doesn’t look right… must be about 7.5%-8%.

     

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