Three ways a spread better can prepare for volatility

published 22 November 2011

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.

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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.

Tim graduated with a history degree from Cambridge University in 1989 and, after a year of travelling, joined the financial services firm Ernst and Young in 1990, qualifying as a chartered accountant in 1994.

He then moved into financial markets training, designing and running a variety of courses at graduate level and beyond for a range of organisations including the Securities and Investment Institute and UBS. He joined MoneyWeek in 2007.