Introduction

Spread betting is slowly becoming an increasingly popular form of trading. However, given that it is an extremely leveraged product and depends on margins provided by the brokers, there is often a hidden cost involved with holding a position beyond its expiry. A trader needs to be aware of these charges, in order to avoid making mistakes while trading using spread bets.

Rollover costs

Spread bets can be executed using multiple time frames. They can either expire at the end of the day or the end of the month or can even expire at the end of the year, depending on the trader’s personal preference.  This type of position (bet) on margins will have the financing fees priced into the quotes the spread betting broker provides.

Hence, if a trader enters into and exits the trade within the specified time frame, he does not have to pay any additional financing charges. However, if he wants to carry forward that trade to the next time-frame i.e. next day/month/year, the trader would have to pay an additional charge/charges. The terminally used for these fees are called a "rollover charge" or the "cost of carry."

What does "Cost of Carry" mean?

"Cost of carry" can essential be described as the price of "carrying over" the trade into the next time-period. It involves closing the existing bet and opening a new one in the next period. There will most often be a difference in the price at which the trade is closed and then reopened. The "cost of carry" is referred as the spread or as the difference and is payable by the trader whenever he rolls over his position into the next time frame. The greater the spread is between the quotes; the higher the "cost of carry" will be. The same principle is applicable for daily, monthly and yearly rollovers. The "cost of carry" is expressed in terms of percentage and is linked to the LIBOR. It is normally at Libor +-2.5%.

E.g. A trader has an existing daily bet of EUR/USD that expires at 1.10/1.11 at the end of the day. If the trader wishes to rollover the trade to the next day, then the exiting position would be sold at 1.10 and then re-purchased at 1.11. The trader would thus have to bear the cost of 0.01 for rolling over the trade to the next day. The same would be applicable if he had a monthly/yearly expiry and wanted to rollover the trade to the next month/year. The cost of carrying the trade, however, would only be applicable at the end of the month/year and not on a daily basis as is the case with daily rollovers.

Implications of rollover costs:

The rollover costs will need to be paid whenever a position needs to be rolled over. The 'rollover costs' will have a significant impact on the profitability of the trade. If the trade gets rolled over multiple times, it may significantly eat into the trader's profits or add to existing losses.

E.g. A trader enters into a long spread bet position at EUR/USD at 1.10/1.11 and rolls it over daily for ten days, the average "cost of carry" is 0.01 per day.  Moving further, if he/she waits ten days, and the pair is trading at 1.21/1.22, the position would have made a profit of 0.10. However, as he/she has rolled the bet for ten consecutive days, he/she would have paid 0.10 to rollover daily for that period. For this reason, the rollover cost would have taken up all the profit.

Thus, it is important for a trader to be aware of the implications before rolling over a trade.