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Guaranteed Stops

Posted By Robert On Thursday, December 12th, 2013 With 0 Comments

Some providers offer clients a facility whereby they secure your Stop Loss order and guarantee that orders are executed at your chosen level. This will prevent you from receiving a ‘gap’ fill when the first available price is actually worse than your chosen level.

Although stop orders aim to cap your potential loss at a particular level, there is no guarantee that the order will trigger at your intended level in the event that the price “gaps through” that price level on some unexpected adverse news. Actually, there is such a guarantee if your chosen spread betting company allows you to apply a guaranteed stop order.

The Guaranteed Stop order may be available only for certain accounts (say Limited Risk Accounts) and there maybe an additional fee charged for placing a guaranteed stop. Please note that a Guarantied Stop will need to be placed a minimum distance away from the market, equivalent to the Minimum MR but can be moved as far away from the minimum distance as you wish.

Since guaranteed stop orders come at a cost (discussed shortly) my usual recommendation is to only use the ‘insurance’ provided by guaranteed stop orders to insure the risks you can’t afford to take.

For example: if you had placed a long bet on French bank Credit Agricole on 16 May 2012, you may have considered there to be a real possibility of the share price crashing (even more than it already had) if Greece was forced to exit the Euro. With the price at 3.00 but with the decimals counting as ‘points’ for spread betting purposes, the potential loss on a total share price collapse was as high as £15,000 on a £50-per-point bet. It would be a big potential loss that you couldn’t afford to take in your modest £5000 spread betting account, so you might have considered the additional ‘insurance premium’ of a guaranteed stop order to be well worth the money for the protection it afforded.

On the other hand: on your £20-per-per-point exploratory position in Dixons Retail priced at just 12-p-per-share, no stop order at all (let along a guaranteed one) would be necessary in order to protect you from the minimal £240 loss that you could reasonably absorb.

On many spread betting platforms you have to decide whether or not you want to apply a guaranteed stop order at the time you place your bet and it’s too late to apply a guarantee retrospectively once your trade is open. The good news is that, at the time of writing, the London Capital Group spread betting brands such as Capital Spreads allow you to guarantee your existing stop order retrospectively.

Let’s take another example. On 27th November 2014 Thomas Cook (TCG) shares dropped sharply hitting my stop at 120p. The day before Thomas Cook shares were trading at some 137p. The lowest price for the day on 27th November was 104.60p and the stock opened at some 113p. Exiting at 120p would have been impossible unless I had a guaranteed stop loss (which I didn’t) in which case my position would have stopped at 120p. Note that guaranteed stops carry a small cost as this is effectively insurance. Given that the stock opened at 113p breaching my stop of 120p my provider would have exited me at the next best available price, say 113p or lower.

The Costs of Guaranteed Stops

Since the spread betting company is taking the risk of the price falling through your guaranteed stop order level, it quite rightly expects you to pay for the privilege of this “insurance” against an unexpected loss. The cost of the guaranteed stop order can take several forms:

  • A one-off fee that is debited from your account balance.
  • An extra-wide spread when opening the trade.
  • A wider stop distance that increases your risk-to-stop loss and which lessons the chance of the spread betting company needing to honour the guarantee.

Note that while the first two charges are levied at the time you open the bet or guarantee the stop order, the greater distance-to-stop will not cost you at all if the price does not subsequently fall to the stop level, and it might actually help you not to set your stop orders too tight.

 

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