Financial spread betting can offer traders the opportunity to trade a broad range of underlying assets and markets, without having to own the assets or commit the full value of a trade upfront thanks to the use of margin. Many of these markets are tradable as two different types of contracts, either as a rolling daily or a future, but derived from the same underlying market.
So in this section we will explain how the two different types of contracts work, how their pricing, spreads and costs differ and which types of trades they are most suited to.
Types of Contracts
Most providers offer two types of spread betting contracts:
A ‘Rolling Daily’ contract that can be kept open for as long as the trader wants. Technically the rolling contracts do actually expire although many years in the future.
A ‘Futures’ contract that has a stated expiry date, although it can be closed at any time before that date. Futures contracts can be rolled into the next corresponding month or quarter.
You need to pick the type of contract that will best suite the duration of your trade as they have different prices, spreads and costs.
Rolling Daily Contracts
Rolling Daily contracts roll over from one day to the next, along with any corresponding orders that might be attached. An overnight financing rate is applied for every night that you hold a Rolling Daily contract open. But Rolling Daily contracts can still provide a cost-effective solution for short to medium term trading.
The advantages of Rolling Daily contract include tighter spreads, lower margins and a provider’s quote that is easier to equate with the underlying market.
Rolling Daily contracts on individual shares can be kept open over periods when dividends are paid on the underlying shares. For this reason, dividend adjustments are made to your account if you hold a position in a share (or an index, in some cases) that goes ex-dividend.
If you open a position with a ‘buy’ to go ‘long’ on a share and that position is open when the share goes ex-dividend, then you will receive a credit to your account for 80% of the total dividend payment.
If you open a position with a ‘sell’ to go ‘short’ on a share and the position is open when the share goes ex-dividend, then a debit will be made to your account equivalent to 100% of the total dividend due.
Overnight Financing of Rolling Daily Contracts
Overnight financing is applied to Rolling Daily contracts because you are only putting down the ‘Initial Margin Requirement’ to open a position. For maintaining a ‘long’ trading position a debit is made to your account.
Buy you can receive a credit of overnight financing for a Rolling Daily ‘sell’ position, although during times when interest rates are very low you may even be debited for short positions too.
Your account therefore incurs a debit or credit for each day that a Rolling Daily position is held overnight.
Any Rolling Daily position held on a Friday night or over a provider’s non-business day (a bank holiday, for example) will incur financing to reflect the number of nights until the next opening session for that market. For example, any position that is rolled from a Friday night to Monday morning will incur a financing charge of three days.
“Jargon buster – Overnight financing: An interest rate based debit/credit applied to the account of clients who keep a Rolling Daily contract open overnight. This is made because clients trading on margin are effectively being given a loan to cover the total notional value of their positions.”
How Overnight Financing is Calculated
The overnight financing for a Rolling Daily position can be calculated using the following formula -:
The Relevant Funding Rate (RFR) is generally equivalent to the base rate of the underlying currency of the country of the market concerned.
Shares and Indices
The Rolling Funding Rate (RFR) for a short Rolling Daily contract on a US share is calculated using the US Fed Funds Rate minus say 2% or 2.5% according to the provider.
If you use a ‘buy’ trade to go ‘long’ on a share or index, this equates to real market exposure and so interest is applied to the total notional value of the position for each night that it’s held open. If you use a ‘sell’ trade to go ‘short’ on a share or index, interest may be paid on the total notional value of the trade.
Currencies
RFF is the central bank base interest rate corresponding to the 2nd currency minus the central bank base interest rate corresponding to the 1st currency.
For example, a trade on GBP/USD Rolling Daily, the first currency is sterling and the second currency is the US dollar. Therefore, if the UK base rate was 4.75% and the US base rate was 2%, the the RFR for GBP/USD would be 2%-4.75% = minus 2.75% (a negative differential).
Remember to add 2% to the RFF for long positions and subtract 2% for short positions.
Here are some more examples -:
Future Contracts
Future contracts are different to Rolling Daily contracts in that they are derived from live underlying futures contracts traded in the market, that will expire on a defined date.
You can close a futures trade at anytime before the expiry of the contract just as it can with a Rolling Daily contract. But the price quoted for a futures contract will have already taken into consideration all interest rate costs and any future dividend payments due between now and the time of expiry.
For example, a provider’s UK 100 Rolling Daily price might be quoted as 5000-5001, but the June future might be quoted at 5020-5024, and the September future might be 5031-5035.
This means that on the day of the price quote, the June future is trading at a ‘fair value’ to the cash index of plus 22 points and the September future is trading at plus 33 points.
Note also, that the future contracts generally have a wider spread than the Rolling Daily contracts.
On every subsequent day as the June futures contract gets closer to its expiry date, the fair value will gradually reduce towards zero as the interest rate costs reduce and ex-dividend dates are passed.
Tip: You can rollover a futures contract yourself online, but if you did so, you would pay the full spread for both markets.By doing the rollover over the telephone with the company’s dealers, you may be able to save up to half of the spread on one side of the deal.”Some providers will close your original position at the mid-point of the current quote meaning that you do not pay any additional spread on closing the existing position.
Future Contract Rollovers
Most providers offer you the option to roll a futures contract into the next contract month/quarter, for example, to close a June UK 100 Future contract and open a September UK 100 Future contract.
You may wish to rollover a futures contract where the current month contract is about to expire but you want to keep the trade open into the next contract period.
Rolling over a futures contract is more cost effective when you do so on the telephone, because you can save half of the spread on one side of the deal.
For example, imagine you have an open ‘buy’ trade of £10 per point in the June UK 100 futures contract at 5100 and the current quote for this contract is 5112-5116, while at the same time the corresponding provider’s quote for the September contract is 5132-5136. If you closed out the June trade yourself online, and immediately bought the September contract you would sell at 5112 and re-buy at 5136.
If you made the same trade through a provider’s telephone dealers, you might be able to sell at the mid point on the June contract, which is 5114, and re-buy at 5136. This would save you 2 points at £10 per point = £20.
Risks: When you instruct a provider to rollover a futures contract, the existing position is closed, realising any profits or losses. If you had any limit orders attached to the original position these will also be lost and you will have to attach new limit orders.
Comparing Rolling Daily Spread Bets with Future Contracts
With most markets, you have the choice over whether to trade the Rolling Daily contract or the Futures contract for any given market. On some markets however, you will have no choice as certain spread betting providers do not quote Rolling Daily prices for some markets or monthly/quarterly prices for others.
In general, Rolling Daily contracts tend to be used by traders looking for short term positions and the quarterly and monthly futures contracts by those looking to take a longer term view.
To help you make your choice, here is a table showing the main differences between the two types of contract -:
* Share futures are calculated by a provider using a cost of carry.
** Technically, Rolling contracts have a theoretical expiry date but this is many years in the future.
Summary
- Rolling and future contracts on the same underlying market have similar price action but display some fundamental differences.
- You have to pay overnight financing for a ‘buy’ on a Rolling Daily contract.
- Sometimes you will receive overnight financing for a ‘sell’ Rolling Daily contract.
- You can rollover a futures contract to the next month or quarter and save half of the spread on one side of the deal.