Trading Underlying vs. Derivative is the same? (who here is handy with Excel?)

[Chiefton]

Hello

If you're handy with Excel, then this is the thread for you

I have produced a spreadsheet which, I think, shows that trading spreads is the same as trading the underlying and that a £1 per penny / cent movement in the price is the same as trading 100 shares whose value increases or decreases by 1p / 1c.

Could somebody possibly take a quick look at the sheet to sense check it? I do not know if its is right, I think it is, but would like opinions and comments.

 

[foredog]

Do you mean that for example:

Spreadbetting long £10 per point in Barclays is the same as buying 1000 shares?

If so yes. Really easy way to work this out.

Write down how much you'd like to bet per point eg. £10.00

move the decimal back two places, there's your number of shares.

But the other thing to consider is that the SB will have a wider proce than in the underlying market and at a certain trade size it will be more cost effective to (for FTSE stocks) trade CFD the underlying and pay a commission. (ETrade£9.95 per trade CFD)

 

[Chiefton]

Hello foredog.

I was looking at it from the overall perspective ie. is it more cost effective to trade spreads vs. underlying once you have taken into account:

(1) commission costs + taxes
(2) bid / ask spread
(3) rollover costs

etc.

My analysis doesn't incl. rollover costs, which is a flaw. Once I figure out how the rollover stuff works I will see if I can try to incorporate it.

 

[Chiefton]

Oh, I forgot to add, for anybody downloading my sheet, the inputs are the squares coloured in green ie. those are the ones you can edit to change values. If you start messing around with the black coloured data, this is all formula based, you will knock the formulas out and it won't make much sense.

 

[new_trader]

Hello

If you're handy with Excel, then this is the thread for you

I have produced a spreadsheet which, I think, shows that trading spreads is the same as trading the underlying and that a £1 per penny / cent movement in the price is the same as trading 100 shares whose value increases or decreases by 1p / 1c.

Could somebody possibly take a quick look at the sheet to sense check it? I do not know if its is right, I think it is, but would like opinions and comments.

That is beside the point (I think). The main reason people trade derivatives is for the leverage.

 

[foredog]

I'm assuming your trading either SB of CFD rather than actually buying the physical stock. Therefore no stamp duty on either and in theory the rollover cost/financing would be the same for either product as both are traded on margin.

I'd say generally if you're trading larger size (£15k+) it's probably cheaper to do it through Etrade for £9.95 each trade (£19.9 total comm) than pay the extra spread to the SB.

for example i think yesterday IG had a 3/4p spread on HSBC when the market was 1/4p

For 1000shs Sb is cheapest £7.50 vs etrade £19.90 + £2.50(spread)= £22.40

But for 5000shs

Sb = £37.50 Etrade= £19.90 + £12.50 = 32.40

 

[Chiefton]

The main reason people trade derivatives is for the leverage.[/COLOR]

Sure, I agree with you on that one, but my thinking and for me personally is that I trade spreads as up to a certain size, it is cheaper than buying the underlying due to the commission costs to buy and then sell. The cheapest I have seen is around £7 one way, so £14 to "in and out"...with SB you gotta be doing a reasonable size or be buying a less liquid stock to be -£14 down as soon as you place the trade due to the bid vs. ask price.

Hope I am making sense