T2W Trading Community

Why are some prices different for different months?

We haven’t finished with price yet – check this screen out....

US shares bets, the quarterly bets

- and the 'Rolling Daily' (intraday priced) versions

In the upper picture American Express is listed as

American Express June at 52.24 – 52.55
American Express March at 52.03 – 52.27

whilst in the lower picture we see American Express Rolling Daily 51.88 – 52.01

What gives? Well, first off as the market is closed the spreads tend to go a bit odd, the bid and ask (ie the sell and buy prices) get a lot further apart – when the markets are open these spreads are much tighter, but they still show what I want to get across – the prices differ for different bets on the same share (or index, commodity, etc). The ‘June’ price is where you are betting that the price will go outside the quoted spread in your favour before the June bet ‘times out’... it’s a bet on the future value of the share, and bets are made based on them closing on a specific date in March, June, September, and December each year. Consequently Capital Spreads are offering bets on the ‘next two quarters’, so in March the March future bet will stop trading and anyone still holding a bet at that time will either have it closed out and the profit/loss then showing will be applied, or it can be ‘rolled over’ (I’ll explain that in a moment).

Now it stands to reason that the price will move over time, so the likely price for a share in March will differ from that in June, and so on. The price will move away from the current share price to reflect where it is expected to go, and there are all sorts of boring things involved like interest payments on the future, and so on... a future is really a contract to deliver something on a specific settlement day, so what you are sort of betting on is:-

“Some people have contracted to deliver some shares in American express on a specific date in March (or June, etc) to some other people. The first group think that they know what those shares will be worth then better than the second lot, and vice versa.”

It’s not really complicated (ho ho), but it is outside the scope of this little piece, so feel free to read up on futures.... just think of it as ‘what the share is expected to be worth’ and it’s chart for American Express. It also explains why the March price and the June price are different to each other – different delivery date, different period to calculate interest over... different futures price. The daily rolling price is, by contrast, a delight – it will match what you see on your real-time screen, give or take the few cents/pennies the spreadbet company are skimming off each trade. Consequently when you look at the daily rolling price and compare it to the live price for the share, hey presto, it matches.

Now I for one find this easier to handle – the spreadbet quote moves (a trifle sluggishly at times perhaps) as I see the price on my real-time charts move, and what I see on the chart is pretty well the same as on my spreadbet positions list - the difference is the bit they skim off, a cent or two mostly, and I know where the price needs to be on the real-time chart for it to equal breakeven on my account.

What was that ‘rolling’ bit, and what is ‘rolling over’?

Suppose you were long on American Express at 52.01, you entered during the ‘doldrum’ period (from 11.15/11.30 to about 2pm EST... call it 4.15 – 7.15pm UK winter time). The chart is stubborn, it refuses to move as the close approaches and you are positive it’s going to climb.... you could close the bet and enter a new one tomorrow, this will cost you a few pounds all told, or you can ‘roll it over’ – a small fee (rolling over a daily bet on a $25 share came to about 20p yesterday when I did it) will ensure the bet stays open and resumes tomorrow. Now personally, at the moment, I don’t want to do that – I was trying to close the bet I mentioned and due to a minor hitch the market closed seconds before I got to the icon to do it. I don’t like it, because overnight gaps are fairly common, and whilst a gap up of $1 would be a nice £100 bonus at £1 a point I don’t want to pay £100 per dollar moved if the gap is in the other direction! However, it is possible to do it, if you want to.

What’s IMR?

IMR means the “initial margin requirement”, and basically it tells you how many pounds must be free for trading for every point bet on each share, index etc. On Capital Spreads AXP (I got fed up typing American Express, that’s the ticker for it), has an IMR of 250. That means you must have £250 in the pot, free – ie not already allocated to a trade – for every £1 you want to bet on AXP. So you bet long on AXP for £1 a point, you need £250 in your account. If your losses get big enough to exceed what you have then you will be given a short period to put extra money into your account. After that 2 minutes is over (okay, maybe a bit longer – I’m just trying to stress that they aren’t going to wait very long at all before you’ve had your chance) they’ll close open positions until you are in the black, or they’re all shut and you still owe money.

Now if you have only got a few hundred quid, and are limited to a minimum of £1/point, then seeing Google with an IMR of 500 is going to tell you something – you can’t afford to trade Google. You look at your account balance, and however many pounds are in it is the total IMR you can afford to bet – so if you have £500 in the pot and trade Disney (IMR=130) and General Motors (IMR 200) that’s 330 gone, you can’t trade anything with an IMR above 170 without closing one of the open pair because the IMR will add up to more ‘points’ than you have got pounds to cover. Simple.

Choosing shares to trade

What I find useful – okay, I am currently trading small amounts in the daily US shares, I have copied many of the ‘daily US rolling’ shares to my portfolio, and I have the same shares set up in esignal for charting. I’ve typed the same list into Excel and it lists the IMR and the sector the share is in as well as other things such as volatility.

Right at the very bottom are shares I don’t touch – ADCT (ADC Telco) has an IMR of only 10... the share price is tiny, $2.30 or so, and a huge bar is about 3c in size... the spread is very small, but still huge as a fraction of the moves you can trade. There is a trade off - low IMR can be considered low risk from some viewpoints, with smaller price moves generally. Some $20 shares bounce around far more than some $50 ones, but overall the low IMR shares are less inclined to give a heart attack. The downside is that the swings can be so small that you are not really likely to gain a great amount from the winners, and there’s little point trading small positions where wins are minimal but spreads produce a steady drain. You need to find a price area you are happy and over time you will probably find you like certain shares and trade them much more often than others.

It is also useful to know the share’s volatility – you can get a range of data to describe this, volatility figures for different periods, ATR (Average True Range) and so on, but you can’t be sure which is best until you decide how you’ll trade. Somebody looking to trade over an extended period might find something like the 20 day volatility useful, but an intraday trader looking to move in and out of short period swings might find it more useful to find a tool capable of reporting the range or average of price swings the share experiences, or simply to eyeball a chart to visually assess that sort of detail.

Automatic stops

If you use Capital Spreads, and for all I know others do this as well, then your trade may have an automatic stop placed under it when you select a long (ie buy) bet - or above it if shorting. On Capital Spreads this is called a Computer Generated Stop Loss (CGSL) and they’ve got a formula that calculates an automatic stop at around 80% of the entry, which is nice I suppose, but personally my first action after entering a trade tends to be to move the stop much closer to the price – it’s just a matter on Capital Spreads of opening the ‘Order Book’ tab, clicking the ‘amend’ button alongside the stop I want to change, and tapping a new price in. Why? If the chart goes the wrong way I want out, I got it wrong – even so a rapid move can catch you out - so having the stop $2 away isn’t much use!