Making Money from CFD Trading

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Stripping the Dividend

CFDs give you the advantages of investing in equities without the inconveniences. One of the most sure-fire date-driven strategies is what is known in the hedge fund industry as 'dividend stripping'.

The reasoning behind it is quite simple really. On the day a company goes ex-dividend a company's share price usually falls as the cash to pay the dividend leaves the balance sheet bound for investors' pockets. In theory, this should "all come out in the wash" as the shares should fall back by the amount paid out in dividend. But this doesn't always happen - stocks with good momentum often don't fall by the full amount. So a trader who jumps in, banks the dividend and bails out before the share price "fully settles down" can often make a tidy profit.

So by buying the shares the day before the ex-dividend date, investors can collect the payout and, by selling the following morning, make their return from the difference between the price drop and the dividend. Returns are only in the order of 0.5% so leverage is a must. But with the advent of CFDs private investors can turn that 0.5% into 5% - not bad over a couple of days. Smith comments, 'If you do a CFD then instead of buying £10,000 shares you can buy £100,000 and get ten times the return.'

Note: The ex-dividend date is the first day on which it is no longer possible to buy the shares and qualify for the dividend. The record date is usually two days after the ex-date. The payment day is the day on which funds are transferred to shareholders.

Triple Witching Hours

Triple witching hour is when stock options, stock index options and stock index futures contracts all expire simultaneously. There is one type of deal for options and two for futures, hence the name triple witching. It is the expiration of individual stock options that can result in increased volatility in shares and provide the opportunity to make some gains.

Triple witching hour is the final hour of the stock market trading session on the third Friday of every March, June, September, and December. In the UK a triple witching hour occurs between 10.15 am and 10.30 am while in the US it happens over the course of an hour, hence the name, during which trading is temporarily stopped.

Options involve trading, or agreeing to trade, stock at a future date at a certain price. When all three contracts expire at once traders rush to balance portfolios which can lead to significant volatility in the underlying indices. During such times computerised trading programmes go into overdrive to balance the portfolios of derivative traders and make sure they are not exposed to crippling losses should the markets move against them.

Sometimes this simultaneous trading can trigger huge movements in the underlying stocks. The most famous recent instance of triple-witching occurred just after 11 September 2001, when jittery markets coincided with triple witching in both the US and the UK. The FTSE 100 fell by 337 at one stage and over 4.1bn shares changed hands.

This volatility will depend on the number of put options versus call options on each individual stock. If there are more puts, then sales will outnumber purchases and the share price may fall. The reverse is true when there are more calls.

You cannot aggregate the number of puts versus calls ahead of the event - but after the 15 minutes are up there is sometimes a chance to make a quick turn. 'If a stock comes out of the period up 5% you can short it and, if it comes out down 5%, buy it on the assumption that the share price will settle back to where it was before the triple witching hour.'

US non-farm payroll numbers

Recent research has found that US data releases on non-farm payrolls, the unemployment rate, initial unemployment claims and consumer sentiment tend to account for the largest moves in both US and British Markets.

US economic data is regularly released at 1.30pm GMT and one of these is the US non-farm payroll employment figure. Why is this figure so important? Most companies may be listed in London but FTSE100 companies derive much of their earnings from the US. This is particularly true for the pharmaceutical, telecom and banking companies that dominate the index. Therefore it should come as no surprise that the state of the US economy can move markets in the UK. One of the key indicators of the US economy is the non-farm payroll employment figure, which is announced on the first Friday of each month.

We can take as an example an extract from Shares Magazine; The impact on the FTSE100 was clear from the release of the February figure on 10 March. In February non-farm payroll employment grew by 243,000 which, according to reports, was above market expectations. The FTSE 100 was weak on the day but put on 60 points between 1.30pm and 4.30pm.' The effect is less pronounced for the FTSE 250 and FTSE Small Cap indices, where constituents are much more skewed to the UK economy.

'Long-Short' Trade

This is a form of pairs trading and is usually referred to as a box trade. It involves placing two opposite trades on the same instrument at the same time; one long and one short. Here you are waiting to gain a sense of market direction and as soon as this becomes clear you would close the losing trade and let the profits on the winning trade accumulate. This system is somewhat controversial as usually for most cfd trades there is a need for market analysis.

Sector Speculating

Market maker CFD provider create synthetic indices over various index sectors including banking, insurance, gold and transport. This provides traders and investors with the opportunity to trade these market sectors rather than trying to isolate individual shares within a sector. For example, a trade may have a particular view on the transport industry as a whole. Rather than trying to determine which individual share CFDs to trade from within that sector, a position could be taken over the transport sector index.

Sector CFDs make it possible to capitalize directly on key macro-economic trends in the market. Sector indices tend to produce smoother trends with less intraday volatility than individual shares, as they represent a broad basket of stocks from within that particular sector.

The picture below highlights the much smoother trend, with less volatility, of the consumer staples sector as a whole, as opposed to the erratic chart of CCL – a key component in this sector. While sector trading does remove the need for individual stock selection decisions, some of the indices or sectors can be dominated by one or two stocks, weighting the sector heavily in line with those few stocks.