Hi y'all,
It's occurred to me that I'm building my model based on some key assumptions about spreadbetting, and I'd really appreciate a multitude of other eyes looking over these assumptions. If I've got anything wrong here, it'll throw everything else out.
Price conversions
I use Yahoo to give me a market bid and market ask price for a stock, then I apply a SB spread increase. IG Index quote 0.1% either side for share betting, so I apply that to my market prices. Question 1: Is Yahoo Finance a decent proxy for the "market price" that IG Index say they apply their 0.1% either side spread to?
Example: Yahoo quotes bid = 299.70, ask = 300.80 for Stock H.
SB equivalent price: bid = Yahoo bid - (Yahoo bid x 0.1%), ask = Yahoo ask + (Yahoo ask x 0.1%)
SB equivalent price: bid = 299.70 - (299.70 x 0.1%), ask = 300.80 + (300.80 x 0.1%)
SB equivalent price: bid = 299.40, ask = 301.10
Question 2: Have I applied the 0.1% spread increase in such a way that it reasonably reflects SB pricing?
To limit the number of variables that I'm working with initially, I'm basing everything on guaranteed risk, which means that (according to IG Index), I have a typical premium of 0.7% included in my opening price, and a minimum stop gap of 7.5%. I'm using IG Index medium volatility for consistency, at some point I'll compare other volatilities and SB companies. To apply the 0.7% premium I compound it with the 0.1% SB spread.
Example: Yahoo quotes bid = 299.70, ask = 300.80 for Stock H.
If I'm going long, I add the premium to the ask
SB equivalent opening ask = (Yahoo ask + (Yahoo ask x 0.1%)) + ((Yahoo ask + (Yahoo ask x 0.1%)) x 0.7%)
SB equivalent opening ask = (300.80 + (300.80 x 0.1%)) + ((300.80 + (300.80 x 0.1%)) x 0.7%)
SB equivalent opening ask = 303.21
If I'm going short, I subtract the premium from the bid
SB equivalent opening bid = (Yahoo bid - (Yahoo bid x 0.1%)) - ((Yahoo bid - (Yahoo bid x 0.1%)) x 0.7%)
SB equivalent opening bid = (299.70 - (299.70 x 0.1%)) - ((299.70 - (299.70 x 0.1%)) x 0.7%)
SB equivalent opening bid = 297.30
Question 3: Am I right to compound the 0.1% and 0.7%? I'm assuming that the premium would be applied to the SB's own price, not the market price.
Minimum stop on a guaranteed risk
Next, to calculate the minimum stop gap of 7.5%, I first calculate what price that would be on the SB platform, and then convert it back to a Yahoo equivalent so I can use it in my experimental tracking.
Example: Yahoo quotes bid = 299.70, ask = 300.80 for Stock H.
SB stop price long = SB bid price - (SB bid price x 7.5%)
SB stop price long = 299.40 - (299.40 x 7.5%)
SB stop price long = 276.95
Yahoo price which would stop out that trade = SB stop price long + (SB stop price long x 0.1%)
Yahoo price which would stop out that trade = 276.95 + (276.95 x 0.1%)
Yahoo price which would stop out that trade = 277.22
SB stop price short = SB ask price + (SB ask price x 7.5%)
SB stop price short = 301.10 + (301.10 x 7.5%)
SB stop price short = 323.68
Yahoo price which would stop out that trade = SB stop price short - (SB stop price short x 0.1%)
Yahoo price which would stop out that trade = 323.68 - (323.68 x 0.1%)
Yahoo price which would stop out that trade = 323.36
Question 4: Am I measuring the so called stop gap from the right baseline? I'm assuming 7.5% stop gap is 7.5% below the SB's own bid price if I'm going long and 7.5% above the SB's own ask price if I'm going short. This may be particular to IG Index.
Risk and reward
I calculate how much risk I'm exposed to by working out how much my account would be down if I stopped out for the full amount using the formulae above. I work out the change in price, which is the difference between what I opened at and what I closed at, and then multiply that by my bet size.
Example: SB quotes bid = 299.40, ask = 301.10 for Stock H, I bet £10 and get stopped out
Going long, change in price = SB opening ask including premium - SB stop price long
Going long, change in price = 303.21 - 276.95
Going long, change in price = 26.26
Loss on long stop = change in price x bet size
Loss on long stop = 26.26 x 10
Loss on long stop = £262.63
Going short, change in price = SB stop price short - SB opening bid including premium
Going short, change in price = 323.68 - 297.30
Going short, change in price = 26.38
Loss on short stop = change in price x bet size
Loss on short stop = 26.38 x 10
Loss on short stop = £263.79
Question 5: Leaving aside for a moment better ways of calculating where to put my stop, am I right in assuming that my risk exposure is equal to my loss on a full bet stop out? It's a guaranteed stop, so there's no slippage to consider in this example.
And finally (many thanks if you've stuck through the sums this far), I'm looking to get a risk:reward ratio of 1:2. For the purposes of simplicity I'll ignore scale out here. To achieve 1:2 risk:reward I need to make twice the value when I win that I lose when I stop out. To calculate that I double my stopped out loss value and divide that through by the bet size to give me the change in price needed to generate the profit. I take the change in price needed and add/subtract it from the opening price including premium to find the closing price that the SB would need to quote for me to take a profit of twice my risk. I then convert this back to a Yahoo price so that I can use it in my experimental tracking.
Example: Yahoo quotes bid = 299.70, ask = 300.80 for Stock H, my bet size = £10
Therefore: SB equivalent price: bid = 299.40, ask = 301.10
And: SB equivalent opening ask = 303.21
And: SB equivalent opening bid = 297.30
And: Loss on long stop = £262.63
And: Loss on short stop = £263.79
Profit value needed going long = 2 x Loss on long stop
Profit value needed going long = 2 x £262.63
Profit value needed going long = £525.26
Long change in price needed = profit value needed / bet size
Long change in price needed = £525.26 / £10
Long change in price needed = 52.53
New SB long price needed = SB equivalent opening ask + long change in price
New SB long price needed = 303.21 + 52.53
New SB long price needed = 355.73
Yahoo equivalent price needed = new SB long price - (new SB long price x 0.1%)
Yahoo equivalent price needed = 355.73 - (new SB long price x 0.1%)
Yahoo equivalent price needed = 355.38
Profit value needed going short = 2 x Loss on short stop
Profit value needed going short = 2 x £263.79
Profit value needed going short = £527.58
Short change in price needed = profit value needed / bet size
Short change in price needed = £527.58 / £10
Short change in price needed = 52.76
New SB short price needed = SB equivalent opening bid - short change in price
New SB short price needed = 297.30 + 52.76
New SB short price needed = 244.55
Yahoo equivalent price needed = new SB short price + (new SB short price x 0.1%)
Yahoo equivalent price needed = 244.55 + (new SB short price x 0.1%)
Yahoo equivalent price needed = 244.79
Question 6: Have I got the concept of a risk:reward ratio right, doubling the value of my stop losses to achieve 1:2?
Gold stars to anybody who managed to read through that lot, it looks like a school exam paper. I'd much appreciate the help of anybody prepared to have a pop at the questions, but fully understand if you lost the will to live half way through
nline2lo
Cheers,
Sal
(odds on I have to come back and edit a typo in that lot, there's no way I could have got all those numbers right first time!)
1st edit: just a formatting thing