The recent fall in the travel group Thomas Cook's share price was spectacular even in the context of the last few volatile years. This morning the shares fell nearly 70% on news that the troubled tour operator is in talks with its banks for more financial help.
Whilst for some spread betters who have been short the shares this will have been a good result, it also highlights the risks of not covering your position on the long side or simply not being ready for a big move. Here are three tips for spread betters planning to lay bets on highly volatile shares.
Have enough cash
When shares are capable of diving 50% or more in a day, margin requirements can rocket. For a large bet on Thomas Cook for example, some brokers want as much as 75% of the total exposure as a deposit. So good liquidity is essential for any spread better thinking of running a position.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Consider guaranteed stops
Naturally these don't come cheap when shares are volatile. But they do get you out at a known loss level unlike a plain stop, which may not if lots of others are activated around it.
Watch the spread
When shares get volatile, bid-to-offer spreads can leap. This may seriously cut down the profit on your trade. For example, say a share trades at £2 and the spread isfour points, the price quoted is £1.98-£2.02. You sell at £1.98. Then the share plummets to £1.50 but now the spread is 20 points so the new bid/offer prices are £1.40-£1.60. Sure you've still made money ((£1.98-£1.60) x your bet size per point) but probably quite a bit less than you hoped. In a worst case scenario,a widening spread can wipe out your profits altogether.
-
Going part-time could leave a £58,000 hole in your pension: how to plug the gapThere are many reasons for switching to part-time work, but some savers don’t consider the impact on their pension until it is too late
-
Three bargain investment trusts to add to your portfolioThese three investment trusts are bargains compared to their net asset value (NAV), but one fund analyst thinks the deep discounts are unwarranted.
