Three ways to hedge using spread bets

Spread betting is more than just a tool for speculation - it can also be used to hedge. Tim Bennett gives three examples when spread betting can be used to guard against short-term risk.

Despite their deserved reputation as speculators' tools, you can also use spread bets to reduce short-term risk. This is known as hedging. Here are three short examples.

1. You are planning to buy some FTSE 100 shares in three months' time when a big slice of dividend income comes in from your existing portfolio. But the FTSE is rising fast. You're worried that if you wait three months before buying, you'll have to pay a fortune for the shares. So you could hedge with a spread bet. Place an up bet on the FTSE now. If the index rises over the next three months, your cash profit from the bet when you close it out, plus the dividend income you receive, should allow you to buy roughly as many shares as you could have done had the dividend been paid three months earlier.

2. You hold a large position in a company. You believe that the next set of results will be poor, and you'd like to take advantage in the short term. But long-term, you're happy to hold Company A shares, and you don't want the expense and hassle of selling up now, waiting, then buying all your shares back cheaper. After all, that would incur trading costs when you buy and sell, stamp duty at 0.5% on the repurchase, and perhaps even a capital gains tax bill on the disposal.

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So instead, you could keep the shares and place a down bet on Company A using a spread bet. Assuming Company A then drops, you'll make a tax-free profit on the spread bet when you close it out at the lower price, and not have to bother churning your Company A shares.

3. The end of the tax year is approaching (5 April). You have yet to use up your annual capital gains tax (CGT) allowance. Under the old 'bed and breakfasting' rules, you could sell some FTSE 100 shares through your broker just before the end of the tax year, then buy them back just after to trigger a gain that could be absorbed by the CGT allowance.

But now you must complete your sale more than 30 days before the year-end. That's a long time to be on the sidelines hoping the market doesn't rise. One way to hedge the problem is to buy a FTSE 100 spread bet when you make your share sale. Then, if the index rises while you are waiting to repurchase your shares, you'll make a tax-free gain on the bet. That will help to fund the repurchase of your shares.

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.