spreadbet magazine v4+fatprophets

7/31/2019 Spreadbet Magazine v4+FatProphets

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The e-magazine created especially for active spreadbetters and CFD traders Issue 4 - May 2012

MAYEDITION

Evil Knievils how toshort stocks

Continued - Part 2

BinariesWhat are they and

how do you use them?

Heritage OilSpecial stock focus

All your favouritecolumns including...

Directors dealings and Guess the FTSEend month value to win 1000

FatProphets complimentary copy


2/81

Editorial

Contributors

Simon Cawkwell aka Evil Knievil lives in West London and has successfully

navigated the markets for nearly 45 years. Although he started working life asa chartered accountant, he came to prominence with the collapse of the

infamous Robert Maxwells affairs where he cleared 250,000 prot sometwenty years ago - no small sum back then. His specialisation is short-sellingand he is a self confessed inveterate gambler. One things for sure he doesntpull punches and tells it as it is!

Dominic Picarda is a Chartered Market Technician and has been

responsible for the co-ordination of the Investors Chronicles chartingcoverage for 4 years. He is also an Associate Editor of the FT and frequentlyspeaks at seminars and other trading events. Dominic holds an MSc inEconomic History from the LSE & Political Science.

Robbie Burns - The Naked Trader has been a full-time trader since 2001 andhas made in excess of a million pounds trading the markets. Hes alsowritten three editions of his book Naked Trader and the Naked TraderGuide to Spreadbetting and runs day seminars using live markets to explain

how he makes money. Robbie hates jargon and loves simplicity.

Simon Cawkwell aka Evil Knievil

Dominic Picarda

Robbie Burns aka The Naked Trader


3/81May 2012 | www.spreadbetmagazine.com | 3

Welcome to the fourth edition of Spreadbet Magazine.

Well, its certainly been an interesting month, to say the least, what with the collapse

of Worldspreads and a re-ignition of debt fears in the Eurozone, this time with Spain in

the crosshairs making for difcult market conditions again.

In the wake of the Worldspreads collapse, we have written a special piece this month

on just what you need to know as a client with regards to your personal classication.

After the collapse into administration of now 3 companies in recent years - Global

Trader, MF Global and Worldspreads, we think that our readers should be made

aware, as much as possible, of their client statuses and the implications of these.

Starting from next month, we are pleased to report that we will be enhancing our

offering to Spreadbet and CFD traders through a daily blog on our

www.spreadbetmagazine.com website, and which will feature topical updates on

breaking news stories with, of course, our own specic take on these items. This will

also be free to all readers. If there are any other suggestions as to what youd like to

see on our website (and in the mag), as ever, please email me at

[email protected]. We particularly encourage letters/emails from our

readers, and for each one printed we will send a bottle of (decent!) French red -

another subject close to my heart!

This month we conclude our special 2 part Evil Knievil piece on shorting stocks and

also re-visit some of our stories on certain companies that we have written about so

far this year including JJB, Groupon and Xcite Energy. I am also pleased to introduce

another new contributor to you - Precogz, who have a unique way of analysing the

markets. Id recommend you visit their site - www.precogz.com - to see what they are

all about.

Our main article attempts to take a view on where we are in the never ending bull:

bear market cycle. We, of all people, know that trading the markets is not easy, and sohopefully a true spreadbettors take on where we currently are will at least provoke

thought amongst our readers, and maybe concentrate your views and help you with

your strategy.

I sign off with a few words to reect on - leverage - its like alcohol - there to be

enjoyed, but remember to control it!

Protable trading to you all.

Richard

ForewordReliance on contentdisclaimerMaterial contained within the Spreadbet

Magazine and its website is for general

information purposes only and is notintended to be relied upon by individual

readers in making (or refraining from

making) any specic investment decision.

Spreadbet Magazine Ltd does not accept

any liability for any loss suffered by any

user as a result of any such decision.

Please note that the prices of shares,

spreadbets and CFDs can rise and fall

sharply and you may not get back the

money you originally invested,

particularly where these investments

are leveraged.

In comparing the investments described

in this publication and website, you should

bear in mind that the nature of such

investments and of the returns, risks and

charges, differ from one investment to

another. Smaller companies with a short

track record tend to be more risky than

larger, well established companies. The

investments and services mentioned in

this publication will not be suitable for

all readers.

You should assess the suitability of the

recommendations (implicit or otherwise),

investments and services mentioned in

this magazine, and the related website, to

your own circumstances. If you have any

doubts about the suitability of any

investment or service, you should take

appropriate professional advice.

The views and recommendations in this

publication are based on information

from a variety of sources. Although theseare believed to be reliable, we cannot

guarantee the accuracy or completeness

of the information herein.

As a matter of policy, Spreadbet

Magazine openly discloses that our

contributors may have interests in

investments and/or providers of

services referred to in this publication.


4/814 | www.spreadbetmagazine.com | May 2012

Bull marketcontinuation orimpending bear

market?

Worldspreads collapse

6

41

Robbie Burns aka The Naked TraderOur regular feature writer regales us with some trading wisdom.

What you need to know and questions to be asked.

Evil Knievils guide to successfully shorting stocks54

52

Commodities Corner49InterTraders Dafni Sedari covers silver this month.

36 Large cap focus - HSBCA FatProphets feature on the banking giant.

44 Research in MotionA Conviction Buy recommendation on the eponymous Blackberry maker.

Part 2 of our special feature by the Uks most feared bear raider.

Contents

46 Options CornerThis month we take a look at how to use calendar and ratio spreads.



School Corner

Heritage Oil

20 14

26

60

Directors dealings

64

One noteworthy sale and two interesting purchases.

Dominic Picardas Technical TakeOur special contributor Dominic Picarda covers the Dow Jones, S&P 500 and the FTSE 100.

A tradersguide

Unloved, forgotten andmaterially undervalued

To successfulspreadbetting

Binaries explained

70

Groupon updateA fresh look at the online coupon company.

73 Small cap featureJJB Sports update.

66

Xcite EnergyContrarian UKs 2012 outlook.

Precogz74Range Resources, Rocket Science and just who are Precogz?

Competition - Guess the FTSE 100 month end level76Dont miss your chance to win 1000



Bull marketcontinuation orimpending bear

market?

Special Feature

The beauty of spreadbetting and CFD trading is that it presents theopportunity for active traders to position themselves either long orshort on a multitude of nancial instruments.



Bull market vs bear market

This exibility gives you an edge over typical long onlyshare traders and, as regular readers will now nodoubt be becoming acutely aware of from oureducational posts that continually hammer this point

home, as long as you control your leverage then theability to switch from bull to bear at the click of a mouseis a powerful trading tool.

2012 has so far proven to be quite protable (at leastthe rst 2 months were anyway!) for manyspreadbetters. My sources at certain spreadbet rmstell me that clients en bloc made money during Jan &Feb but that the buffers have been hit in recent weeks.As Eurozone debt worries have resurfaced and thebull run from September last year has becomesomewhat exhausted from a pure technical position,simply sitting on the long side has not delivered in

recent weeks.

My own investment ideas have proved to be somewhatthinner on the ground as latent value began to disappearfrom the stock market the last few months. Coupled witha reduction in Directors buying and indeed an increase

in selling on their part in recent weeks and months, thewarning signs from a fundamental perspective were

becoming ever more apparent.

From a technical perspective, one of the proprietaryindicators that we use that gives us a measure ofmarket sentiment (click here if you would like moredetails about this) and that is analysed from acontrarian perspective has been ashing warningsignals for several weeks now. A key component of ourindicator is the so called Put:Call ratio that is basedon the level of activity in the US indices as reected in theoptions market.



In the charts below and to the right, you will see how thisseems to have an uncanny record of alerting itsfollowers to bottoms in the market in particular.Whenever it exceeds the 1 level (i.e. 1 put beingpurchased for every 1 call) - albeit with a typical 4 - 6

weeks lead time - the market seems to rise stronglyover ensuing months (circled on the chart). With the

ratio now down at the 0.6 level, we are denitely back inthe bottom of its range (and which has historically beena neutral sign at least and in a number of instances anoutright danger signal). This is denitely worth keepinga close eye on.

On the S&P 500, the MACD lines have begun to roll overand the index recently pierced the 20 day movingaverage to the downside. Having not touched the 50 day

since December of last year, a case for furtherconsolidation with a probable downwards bias cancertainly be made. A move down towards the 1350 level

would represent around a one third retracement of themove from December 2011 - markets have a habit ofretracing previous moves by typically one third or onehalf, and this can be expected with a reasonable degreeof conviction in the next few weeks.

Back in the UK, for home biased traders, the weakness

that we have seen over the last 5 weeks that has takenthe FTSE 100 index down from just under the 6000 levelto 5600 (at time of writing) - a move of approximately 5%- is likely to have been inuenced to a fair degree by endof tax year selling, certainly within the mid and smaller

cap area of the marketplace anyway.

Special Feature

It is in this area that I am now seeing renewed value

opportunities present themselves once again in stockslike CWC, Blnx and many of the sub 250m oil explorerslike BLVN & XEL. It is Spreadbet Magazines view that2012 is likely to be a stock pickers market from here-onout, and that simply buying an index and remaining long isnot the best strategy.

With the FTSE 100, as you can see from the chart to theright, strong support is centred around the 5550/5600level and any penetration of this price-band on heavyvolume that ends with a strong rise on the day back over5600 is likely to signal that the re-tracementconsolidation we are currently seeing is likely comingto an end.




If you are minded to the bull side, then I would suggestaveraging into positions over a period of a couple ofweeks on any weak days that take us back towards the5500/5600 level. The RSI that is moving back towardsthe 50 level is also adding weight to the case that a nice

set-up for a long swing trade is in the making.

Conversely, for those of a bearish tendency, a decisivebreak back below the key 5500 level will likely presagea difcult summer, and a re-test of last years 4800 levelcannot be ruled out. The weekly chart shows apotentially worrying roll over in the MACD and again

illustrates just how critical the 5600 level is - particularlyon a weekly closing basis.

One thing that I personally nd useful is to construct a list of positives and

negatives for the markets, to produce a kind of scorecard of bull and bearndicators. This generally serves me well as a guide to the likely medium-termdirection. We can thus construct the following check-list:



ISA & new tax year sales season generally a bullish time

The ISA sales season and new tax year has just begun - this is a seasonally positive time for equities, particularly whencoming off a period of recent price weakness and where new buying opportunities are becoming more evident.

3

Media coverage

As with the point about retail investors seemingly constantly buying at tops and selling at bottoms, when the media ispositive about an asset class this is typically because the commentator nds comfort in the majority - in essence theywill be bullish on what has gone up and bearish on what has gone down - another indicator that the trend is becomingexhausted. How many times have you seen scaremongering economic stories and TV news headlines (late lastsummer, in particular, springs to mind) precede price rises in equity markets? At present, the media is certainly notbullish on equities and this is therefore a contrarian bull sign.

4

Equities remain cheap v Bonds & Cash

The primary argument for the bulls is that alternate asset classes - basically cash and bonds remain very unattractiverelative to equities. You can still buy quality blue chip stocks with well covered dividend yields (and that are likely torise in coming years - outpacing ination) of around 4-5%. With cash rates at 0.5% and bond rates around 2%, this is a

powerful incentive for equity investment - an incentive that has not yet been taken up by the retail investor mainstream.

2

Underweight retail positioning

Retail investors (unfortunately the perpetual ultimate contrarian indicator) in the UK continue to remain underweightequities and their participation in the stock market in recent years has been much reduced. This is, of course, apotential source of future buying power and therefore a bullish point.

1

Bull Points




Large outstanding margin position in the US

In the US stock market, in particular, there is presently a large margin debt situation - historically a signal that has alsopreceded price weakness. The US has sharply outpaced the UK this year with the FTSE up just over 2%, yet the S&Pup a whopping 11% year to date (at time of writing). Remember the old investment adage - when the US sneezes therest of the world catches a cold - if the US should continue to grind lower and the excess margin get squeezed out ofthe system, it will likely prove difcult for the UK market to make headway against this backdrop - another re-iterationof our view that stock-picking will be key to generating good returns this year.

1

No more QE

Additional QE (Quantitative Easing) looks to be off the table for now following remarks from the FOMC at their lastmeeting in early April and also given increasing signs of a strengthening labour market. With no new injection ofincremental, cheap liquidity (there is, however, already a large amount of liquidity washing around the global nancialsystem that will tend to support asset prices), then this is likely to at least reduce one of the tailwinds behind the recentprice strength in equities.

2

Waning directors stock buying across all markets

As has been agged in the last 2 issues of our magazine, directors participation in the market through purchases of

their own stocks has been neutral at best, with a steady reduction in the volume of purchases and in fact net selling inrecent months. As we are now in a new tax year, it will be interesting to see just how this group of inuential investorsreact over the early part of summer, and following recent price weakness in the market.

3

Bear Points

Click here www.lstrader.co.uk/spreadbetmagfor a free 1 months trial that is being offeredexclusively to our readers.

To conclude, we believe that the battle between bullsand bears is likely to continue on in the near term withno meaningful victor. In the UK, the 5550/5600 level onthe FTSE 100 is likely to be a good point to look to getlong, and we expect Japan is likely to continue to show

strength this year relative to most other markets, indeed,

we strongly suspect that this market is in the very earlystages of a multi-year bull run.

If you are struggling with your own trading in this difcultenvironment and particularly on indices andcommodities, then wed denitely suggest that you take alook at LS Traders trading system that is a medium termtrend following system and that has delivered fantasticreturns over the last 5 years.

The one market that Spreadbet Magazine doesremain particularly bullish on is Japan, as agged atthe start of the year in our inaugural issue thatincluded our 10 Contrarian bets for 2012. TheNikkei 225 index has been the star global performerthis year - up a whopping 24% YTD at the peak in

mid-March, with an almost unbroken run of weeklyrises from just over 8000 to 10250. With the yenweaker against its major trading pairs and thus

providing a bullish backdrop for Japaneseexporters (a large component of their index) and theNikkei breaking its 4 year downtrend decisively, weremain resolutely long here and continue torecommend bull positions in the 9300/9500 indexrange - the 50% retracement level.

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A traders guide

to successfulSpreadbetting -A tried and tested way to put

the odds back in your favourand begin to spreadbetprotably.

Special Feature



A Traders guide

My name is Phil Seaton and I am the system creator and owner of our proprietarytrading system - lstrader.

In this brief article I am going to explain just what the LS Trader system is,

how it works and the philosophy behind it.

Firstly, I have been trading since the late 90s, and myfocus for much of the past decade has been almostexclusively on spread betting, although I do have abackground in futures trading prior to that. When Iinitially began trading I made all the mistakes thatnovices make, but I learned from them quickly. Irealized that to try to gure the markets out singlehandedly was an ominous task so I did the obvious

thing; nd traders that are successful and learn fromthem and copy what they do.

Longevity and results = confidence

This led to my reading virtually every book on tradingthat I could get my hands on and exposed me toliterally hundreds of ideas and concepts, many of whichwere contradictory! The question was then, how do Isort the wheat from the chaff? How do I nd out whatreally works and is really protable in the long run? Itseemed obvious to me that I had to start with a cleancanvas, and test every concept and theory, so this is

what I did.

The rst question to answer was, which main approachwas I going to take? Trading essentially falls into one oftwo categories, or a mixture of both: fundamentaltrading or technical trading. I realized very quicklythat very few individuals will ever succeed trading onfundamentals. There are many reasons for this, but in

short, it is simply impossible to stay on top of all theinformation and news that is available for all themarkets that I wanted to trade and, even if I could do

that, there is no way that I could gain an edge when Iam effectively going up against all the numerous majorfunds with their seemingly unlimited resources andresearch staff. This is simply not an approach that willwork for the typical stay at home trader and I stand bythat view today. Very, very few individuals will eversucceed using a fundamental approach to trading.

Therefore, I knew I had to be technical in order tosucceed and still have some time left over in order tolead a normal life! Over the next few years I

researched and tested out every kind of indicatorthat you can name, from moving averages toBollinger Bands to Stochastics. The list could go on,but essentially you name the indicator and I havetested it rigorously against real market data that

spans many different markets. In fact, I used anexhaustive 20-year data history. I therefore gainedan edge as to what works and what does not work inthe markets, and from that knowledge I built what isnow known as the LS Trader system.

The original system research was completed in 2002

and the system has remained pretty much as itoriginally was with only a few minor tweaks andoccasional changes to the portfolio of markets that ittrades. This is possible only because the

philosophy that the system is built upon is so soundand the system itself so robust that it will very likelycontinue to work well indenitely without much inthe way of further revision.

What my research did conclusively reveal is thatthere are 4 principles that must be incorporated intoany successful trading system and these 4 key points

form the basis of the LS Trader system. These 4 keyconcepts are:

1. Trade with the trend2. Let winning trades run3. Cut losing trades short4. Manage risk

If a system incorporates the above4 rules, it is very likely that it will beprotable in the long run iffollowed consistently.



Successful spreadbetting

Lets just take a very brief look at each of these 4 points:

You will likely have heard the phrase, an object in motion tends to stay in motion. This means in market terms thatthe most likely outcome at any time is that the market will continue to move in the direction that it is currently heading.Therefore by following the trend instead of trying to ght it, you are taking advantage of the laws of physics andmomentum. It is no accident that the vast majority of long term successful money managers use systems that arebased on trend following, and it still remains the most protable approach to trading the markets almost a centuryafter it was rst pioneered.

Trade with the trend1

No matter how good a system or a trader is, he is always likely to have more losing trades than winning trades. This is afact, in spite of what many others may tell you with bogus claims of 80% plus win ratios. If you analyze the track recordof the most successful traders, their win ratio is often between 30-40%. In order for them to be protable, it is obvious,then, that the winners must be larger than the losing trades on average. This can only be accomplished by allowingwinning trades to run, in order to give them a chance to grow into large outsized winning trades and observing rule 3.

Let winning trades run2

One must always allocate a small amount of capital and have a set worst-case scenario exit point before entering atrade, and only relatively small bets must be placed. One should never take a large destabilizing loss. Furthermore,once one has set a stop loss it should never be moved away from the market in order to give a trade more room. Stopsshould only ever be moved closer to the market, initially to reduce risk and subsequently to lock in prots as the trendprogresses.

Of paramount importance to successful long termtrading is cutting losses short

3

The worst thing that can happen to a trader is that he loses all his money. This is akin to the roulette player who losesall his chips. Once the chips are gone, you can no longer play. This is known as the risk of ruin, and ensuring that one

never approaches that state should be at the forefront of every traders thinking. If a trader has a system that has apositive edge or expectancy, such as the LS Trader system, then one needs to ensure that one stays in the game to getinto what I call the long run. In doing so, the odds or success are so highly stacked in the traders favour that successbecomes exponentially more likely.

Manage risk4



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weekly trade sheet.

Trade alert emails are also sent during the week as part of the service.The LS Trader system is based on very sound trading principlesthat have

stood the test of time. It draws on the trading philosophies and trading

rules that the worlds most successful traders use and all of these

principles and trading rules have been vigorously tested.

* Disclaimer - LS Trader results reflect the weekly trades updates from 2007 to end of 2011. Since not all trades were necessarily taken then the results should be seen as

hypothetical. Hypothetical performance results have inherent limitations including the fact that they are generally prepared with the benefit of hindsight. In fact, there are

frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading system . No representation is being

made that any account will or is likely to achieve profits or losses similar to those shown. Future results may be higher or lower than past results.

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Benefits of the LS Trader system

Low Frequency trading system - 5 tradesper week on average.

Easy to use and can be followed in less

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It is a weekly system which is largelyunaffected by noise in the markets.

Very sound money management rules

incorporated into the system.

Medium to long term time frame.

About the LS Trader System

LS Trader system v FTSE 100

SPECIAL1 MONTH TRIAL

FOR READERS



All systems will have lean times and losing periodsand that is a fact of the markets. The marketssimply do not trend all the time and often haveperiods of directionless, choppy markets where it isvery hard to make money. During these times the

trend trader will often get whipsawed out ofnumerous trades shortly after he has entered. It isnecessary, therefore, to be able to sustain a series oflosses so that the trader is still around to takeadvantage of good trading conditions when theyreturn, and they always eventually do. This can only

be accomplished by taking small bets, so that whentrading conditions are not favourable, the minimumamount of damage is done to account equity and themajority of trading capital remains intact following alosing period to capitalize on new trends.

The LS Trader system incorporates all of the above4 rules and has rules to ensure that these principlesare consistently applied. This takes all of the guess-work out of trading as there is a rule for everythingsuch as where to get in, where to get out and how

much to stake depending on account size.

Extensive support and guidance

Subscribers to LS Trader receive everything that theyneed in order to spreadbet successfully. Thisincludes an extensive manual that covers all of thekey concepts required, but most importantly includesour trade updates. This is a summary of the 40markets that we trade, including stock indexes,commodities and forex. This summary, that we callthe weekly trades sheet, lists all 40 markets that we

trade, whether we have a position in each market ornot, the entry price and date as well as the currentstop loss for each market. We also include a list of

entry stops for all markets for the week ahead withthe associated exit stops.

In addition, we send out a weekly email with updateson what has happened during the previous week aswell as our thoughts on what may happen in the weekahead, as well as key technical levels to look out for inthe coming week. We also send out a market

commentary email that covers all of the marketsectors that we trade. Additionally, we send outmid-week email notications if and when any of the

entry stops the trigger to trade - have been hit.

Since we launched the LS Trader system into themarketplace in 2007 andin spite of coinciding withperhaps the most volatile few years in recent markethistory, the results have been extremely impressive,with a CAGR of 75.64%*.The back-tested resultsgoing back to the start of our data (1982) are even

more impressive and bring in a CAGR well in excessof 100%* per year.These sort of returns coupled withour rigorous risk processes are absolutely perfect forspreadbettors. We have many protable subscribers

who have been using us for years.

As an exclusive to Spreadbet Magazine readers weare offering readers a free 30 day trial to see just howour system works and hopefully help generate someprots for you too!

Visit www.lstrader.co.uk/spreadbetmag to takeadvantage of this offer.

Next month well look at some of our trades that wehave undertaken this year and talk through themechanics of this.

Good luck with your trading this month.

Phil Seaton, LS Trader

*Disclaimer: Results are the outcome of back-testing and should be viewed as hypothetical since not all trades were taken. Future

performance may be higher or lower than past performance.

Successful spreadbetting



Daily blog

Startingnext

monthA new daily blogexclusively onwww.spreadbetmagazine.com

Be sure to visit each

day for topical andthought provokingarticles and features.

SUBSCRIBE



School Corner

School Corner-Binariesexplained and

how to usethem.Binary options are quite simply aform of option that offers one

of two outcomes and hence thename binary which typicallydescribes an outcome of either0 or 1.



Binaries explained



In spreadbetting, binaries are available on a widevariety of instruments for example the FTSE 100,S&P500, currencies, European indices, gold etc.You can also bet on a binary outcome with as little

as 10 mins to the expiry - this is more akin to truegambling, however, than typical spreadtrading. The

price range of a binary in spreadbetting is zero -100. Zero representing the 100% probability of theoutcome NOT occurring, and 100 representing the100% probability of the outcome occurring.Let us look at how one works using the FTSE 100:

The FTSE 100 may be trading at say 5600 at theopen of business on a particular day. If you were toplay a daily binary bet on the probability of the FTSE

closing UP on that day, it might be priced at say 50.What this means is there is a 50% chance at thetime of the bet purchase of the FTSE closing either

up or down. Lets say that as the day progresses theFTSE actually falls and the index is trading down 50points at midday. The probability of the index closingup, particularly taking account of the timeremaining that day (4 1/2 hrs), has thereforediminished materially now and so is likely to besomewhat less than 50% at that point. Thus, in thisinstance, the binary is likely to be priced at say 20,i.e. there is now only a 20% chance of the FTSE 100closing up on the day.

There are 2 ways you can play a binary - you can

either buy the binary, or you can either sell thebinary. In the example above, you might think toyourself that the 20% probability of the FTSEclosing up on the day is mispriced and thathistorically, when the FTSE is trading down over 50points and with only around 4 1/2 hours to the close,

that less than 10% of the time would the FTSE stagea rally of that magnitude and close up. Thus, youwould sell the binary at 20. If, however, the FTSE didclose up on the day, your loss would be 80 (100 - 20)x your stake.

School Corner

This is the same as the example used above. Thereis a xed expiry point and the binary is a bet on theprobability of the underlying instrument closing up(or down if a bet on an instrument closing down) atthat particular binarys expiry point. This is thesimplest type of binary to understand and is the mostpopular, and is generally available on a wide variety

of instruments.

A Straight closure/expiry binary1

This is also a relatively straightforward type of binarythat is, as the name says, a bet on the probability ofthe underlying instrument on which the binary isbased touching a particular price point during the lifeof the binary bet, and which could be anything from10 mins to 1 week. For example, you could enter a

binary bet on the GBPUSD which is trading at say$1.5960 touching $1.60 during the next 30 mins. Theprice might be say 55 which means there is, at facevalue, a deemed 55% probability of GBPUSDtouching the $1.60 level. With the one touch bet youare basically stripping out the necessity of the binaryactually expiring over (or under) the trigger level.

One touch binary2

This type of binary involves the underlyinginstrument touching TWO price levels - one that isabove the current price and one that is below thecurrent price. For example, the S&P 500 might betrading at say 1350 and you enter a weekly binaryon the S&P 500 that requires it to touch both 1330

& 1370 (the wider apart the two touch levels are andthe shorter the timescale, the cheaper thesebinaries of course are).

Two/Double touch

binary

3

Heres a list of some of the types of binaries that youcan play:



These binary bets are suited to volatile marketswhere there is a higher probability of the particularinstrument gyrating around the two trigger points- they are likely to be more successful in markets

that are in the latter stages of a deep sell off wherethe downside is invariably lower than you always

expect, but where sharp reversals can occur.If the underlying instrument only touches one of theprice points, the binary still expires at zero.

This type of binary is very similar to the double touchbinary except that it only requires the underlyinginstrument to touch ONE of the 2 trigger points. If ittouches either of the trigger points, then it makes upat 100.

Either-or touchbinary

4

At its heart, a ladder bet is quite simply akin to an

accumulator bet that one would place on thehorses. A trader on a ladder bet is looking for theunderlying instrument to trade through a numberof particular price levels at pre-determined timepoints. The price levels are arranged just like therungs of a ladder, hence the name. For the trade to

be successful, the asset has to have climbed thesteps at certain times in order for the trade toexpire with a prot.

Let us look at an example to see how this would work

and well use the FTSE again. The index level may besay 5600. You could have a ladder with trigger pointsof 5630, 5650 & 5670 - expiry in this instance being16:30 close of business. The payout ratios ascribedto each of these trigger points may be for example20% at 5630, 30% at 5650 and 50% at 5670. If theFTSE trades over 5630 at the expiry, you will receive

a 20% payout and 30% at 5650 and 50% at 5670. It isbasically a succession of one touch binaries.

Ladder binary5

Binaries explained



How to use binaries

Below is a list of how we, at Spreadbet Magazine, would suggest that you usebinaries to the best effect:

Say you are in a medium term trade where you arelong the FTSE 100 at 5600 and you have prot on sidewith the index rising to 5700 (well use a bet size of10 per point for this illustration). On a particular day

you might think that the FTSE is prone to a fall, butyou do not want to exit your long bet which has, as we

established, a medium term timescale to you.

What you could consider here is buying a binary forthe FTSE to close down on that day. If, for example,it is 1pm and theres just under 3 hours to go and theFTSE is up perhaps 20 points, then the binary mightbe priced around 25. You could thus buy abinary equivalent to say half your long spreadbet(5) costing you therefore 125 (5 x 25), and so if the

FTSE did fall back and closed down on the day, thenyou would re-coup 500 (5 x 100 - the binary make

up level). Your prot is therefore 375 (500 - 125cost). Remember though, your long bet of 10 perpoint would have lost 200+ (20 points + fall back x10) and so you have mitigated your loss somewhathere.

Hedging use1Should the market continue to fall and yourconviction grow further then, assuming you have notexhausted too much equity buying the market downvia the binaries, you would progressively increase

your binary bet size thus maximising your protmaking potential when the upswing does come.

Maximum Leverage2

I particularly like these types of trade opportunities.Basically you are looking to take a contrarian view ona particular news feature, for example thenon-farm payrolls gure. If the market is

expecting a low jobs creation number and there hasbeen a degree of weakness in the market in thepreceding days leading up to its release and with the

market being down going into the release of thegures, then this is the type of set up I like on the bullside.

The Dow might be trading around 11900 (down say40 points) and so you look at a one touch bet at12000 - in a lot of cases you get very sharp knee jerkreactions on important statistics and so, assumingthe binary is priced appropriately (less than 30 is

what I would look for here), this is the type of classiccatalyst/contrarian trade you can play.

Catalyst trades3

This type of trade is where there has been a long runof successive rises or falls (history tells us 9 days

down in a row and 8 days up without a reversal ofeither is a good point to look to take a countertrendtrade) and the market is ripe for a corrective so

called swing trade.

High Probabilityswing trades

4

This type of trading is where you have a highconviction in a particular bet but you still do not

want to expose yourself to a large potential equitydrawdown should you be wrong.For example, you might believe that the DAX is

oversold at the 6500 level, but you are fearful offurther volatility and the possibility of more sharpfalls and so you are reluctant to open an outrightlong bet. You could, therefore, use binaries at thispoint to take a position on the Dax rising onsuccessive days, safe in the knowledge that yourdownside is xed at the cost of the binary (i.e. if

your bet size is 20 & the binary costs 30 the cost toyou is - 600).

School Corner



I would typically play this by entering thecountertrend outright long (or short) spreadbet instages, and if the market continues to move awayfrom me, then I would use the binaries as xed costways to average in.

To conclude, binaries are really orientated to themore quick-re short term type of trading or traders- it really is skirting the boundaries of typicalspreadbet position taking and outright gambling. We

would suggest that you allocate no more than 10%of your account value to this type of trading and thatthey be used in the scenarios highlighted above,particularly the deep oversold markets where theprobability of a swing trade back in your favour is

high.

We would also caution against selling any binarybelow a price of 20 - no matter how likely theprobability of the binary expiring at zero seems toyou. The unexpected generally happens in themarkets much more frequently than you would

expect and if youve sold a binary at 20 you havebasically laid odds of 5 to 1 against - do thisfrequently and have a run of bad luck and youll bestaring down some pretty chunky losses quickly.

Similarly, I would also caution against buying a binarybelow 20 just because you think it is cheap. The oldsaying you get what you pay for springs to mind - thechances of a binary that is priced below 20 ultimatelymaking up at 100 is very slim. There is a time to buy

these bets and that is as highlighted above withregards to high probability swing trades.

Finally, one thing I would say is that you can, of course,trade out of a binary at any time before the expiry - youdo not need to run it right to the wire. If, for example,you bought a binary at 45 and lets say it rises to 75,think about selling half or one third of yourposition - this way you are locking a good prot on avery high risk bet instrument. You will greatly extend

the life of your binary account this way as it is plain andsimple good risk management - the cornerstone of

ALL successful traders.

Binaries explained



Heritage Oil -

Heritage Oil

Unloved, forgottenand materiallyundervalued



Unloved, forgotten and materially undervalued



For holders of Heritage Oil, the last 12 - 15 monthshave been painful, to say the least, with the sharesfalling from over 300p in Feb 2011 to plumb the

recent lowly depths of 130p. The reasons put forthby numerous commentators and analysts for the

collapse in value range from questions over thecompanys management and strategic direction, todisappointment in the nding of gas as opposed tooil in their key Miran prospect in Kurdistan, tocontinued worries over when the $405m currentlyheld up in arbitration proceedings through theirdispute with Tullow Oil and the Ugandangovernment will be ultimately returned, through towider concerns with the general global economic

environment.

Spreadbet Magazine believes that, as is always theway, the stock market has over reacted and, quiteextensively so to the issues surrounding Heritage.In fact the depletion of value has been so greatthat within the entire mid cap Oil & Gas explorationsphere we believe they now offer the mostcompelling value on a risk to reward basis. At thecurrent price of 135p (time of writing) the companyhas a market capitalisation of 361m and sits withcash reserves of approximately 200m. This puts a

value of just 161m on the following asset base andwhich we will attempt to nd a realistic value foreach of them -

((i) The prime Kurdistan asset - 75% share in theMiran block, running to over 1,015 sq/km(ii) Producing Russian elds(iii) The Tanzanian assets covering over 25,000sq/km(iv) High-impact exploration in Malta(v) Mali eld prospects

(vi) Pakistan elds(vii) A 51% equity interest and control of Sahara OilServices Holdings Limited which has the necessarylong term permits and licences to provide onshoreand offshore oil eld services in Libya as well as therights to own and operate oil and gas licences.(viii) Approximately 34 million Heritage shares heldin Treasury(ix) Just over 15% of Petro Frontier, owning c.9.75mshares

Heritage Oil

(x) The option value of the return of $405m fromthe Tullow/Ugandan dispute.

Let us look at each asset in turn -

Miran

The market seems to think that a nd of up to 9.1trillion cubic feet of gas (gross in place P50estimate) has no value whatsoever. This is the onlyway one can rationalise the current share price. Thecompany however believes that monetisation of thisasset will commence in 2013 - not too far away now

and sufciently close in timescale that any largetime value discount is not warranted.

The early production will run in parallel to full elddevelopment and the export of gas to Turkey and/or Europe with the full production of blended oil andcondensate. Independent gas marketing studieshave highlighted increasing gas demand inKurdistan, Turkey and Europe that can potentiallyprovide valuable markets for the gas volumes. InApril 2011, Turkeys energy regulatoryauthority ran a licensing process for importation of

gas from Northern Iraq and Kurdistan, with rst gasto be imported in 2014 starting at 700 mmcm/yr andplateauing at 3 Bcm/yr up to 2033, demonstratingreal demand for the gas and in a market on the doorstep of the Miran Field. There is an existingtransmission pipeline system in place in Turkey withonly a 330 km pipeline needing to be built inKurdistan to the Turkish border. We believe this willbe a transformative event for Heritage as themarket will then have to ascribe a value to the gasas it nds a natural export path. See diagram to the

top right showing the existing transmission systemin Turkey.



Unloved, forgotten and undervalued

Full eld valuation models for the Miran Blockconstructed by various independent analysts anchoraround the $3.5 boe (barrel of oil equivalent) range.This equates to circa 1.22bn if the KurdistanRegional Government backs in and reduces

Heritages share of the resources to an estimated558m boe. It is worth taking a look at the tablebelow which produces a value graph of what iscalled EV/2P reserves - basically this is a companysEnterprise Value (market cap + debt) to so calledproven and probable reserves.

You can see just how lowly valued Heritage is relative to theentire sector. Even if one assumes an unheard of $1 boevalue then this equates to 350m based on 558 mmboe,add in the cash of circa 200m and you get the equivalentof 2.13 per share. Remember this excludes any value atall for any of the companys other assets. More realisticestimates of the discounted value of the Miran Field are

between 200 & 300p per share. Some analysts estimates infact go up to and over 4 per share.



Below is a cross section of the Miran East andWest structures which illustrate the hydrocarbonpotential. It is by no means certain that within theEast structure, where drilling commenced in March2012, that Heritage will nd hydrocarbons due tothe nature of an exploration well, however, thestructure is contiguous to the very largehydrocarbon bearing West structure.

Heritage Oil

The company is also continuing to drill down past 3,000metres on their Miran West-3 Well following theupdate in early March and again as can be seen fromthe section below this area is where the company is

appraising the gas discovered in the previous well.

It is worth also reecting on the recent arrival of

Exxon Mobil into Kurdistan too as an illustrationof the political de-risking of this area. The worldslargest oil company signed a deal for six exploration

blocks with the Kurdistan Regional Government(KRG) last November and thus rming upWestern oil majors perceptions of this potentiallyvery important region.

Genel Energy plc, formerly Vallares (the ex BP CEO

Tony Haywards vehicle), holds the balance 25% ofthe Miran licence following their merger with GenelEnerji and, in Spreadbet Magazines opinion, once theroute to monetisation of the large gas nd becomesclearer, we wouldnt rule out the possibility of TonyBuckingham selling the controlling stake in this assetto them, after all Tony Buckinghams history is toexplore, establish value and then sell on thedevelopment prospects of those assets.



Unloved, forgotten and undervalued

Russia

Heritages Russian assets are currently the only oilproducing component of the company located in the

West Siberian province of Khanty-Mansiysk. Thelast independent industry valuation resulted in anestimate of circa 61m barrels of oil and a netpresent value valuation at that point of around186m - approx 74p per share. Analysts typicallyvalue this asset at a conservative 43p per share.

Tanzania

The Tanzanian onshore acreage awarded to

Heritage in Q4 2011 and Q1 2012 appears todisplay a similar prole to the Albert Basin inUganda and which of course Heritage ultimatelysold for $1.45bn (of which a portion is subject to thetax dispute with the Ugandan Government). Thecompany is currently in the process of acquiring 2Dseismic data and should they nd oil here, given thesheer size of the block, this would be anothertransformative event for the company. On an

unrisked (potential attributable value if success inexploration is achieved) basis Tanzania is widely

valued around 87p per share equivalent with a boeassumption of circa $3.50.

Mali

The 2 blocks in Mali look, at this point, to be notmaterial to the company. Heritage has a 75%working interest here having been farmed into theprospect in exchange for carrying out the seismicmapping on the acreage and also drilling one

exploration well. Unrisked values go up to 65p pershare, although the recent coup will most likely leadto delays in the work programme.

Pakistan

The two Pakistan blocks in which Heritage holds a54% and 48% interest respectively, are theSanjawi and Zamzama North blocks.

Any discovered hydrocarbons could be veryeasily connected to the existing infrastructure in this

region as one of the main pipelines actually runsthrough the Zamzama acreage. We ascribe a nominal10p valuation here for the moment.

Sahara Oil ServicesHoldings Limited (SOSH)

It is too early to attach any real attributable value tothe 51% controlling interest in this company but makeno mistake, the potential value of these licences couldbe considerable. The companys purpose behind their

purchase was to play a signicant role in the future

development of the oil & gas industry in Libyaincluding participating in future licensing rounds. Infact, we believe that part of the reason for thisinvestment was also to give them leverage in theboundary dispute with Malta and assist Heritage withthe drilling programme there.

Treasury Stock

At time of writing the company held approximately 34million shares in Treasury giving a current

market value of 46 million.

Option value of Ugandan tax dispute

One can debate the merits of Heritages case against

the Ugandan Government & Tullow until the proverbialcows come home but ultimately, only the outcome ofthe arbitration process will determine who is right andwrong here. Applying simple mathematics of a 50%probability of the return of the monies at some point inmid 2013 and applying a further 5% NPV discount givesan option value of around 46p per share. Of course ifthey are successful in the arbitration then they wouldreceive back approx 1 per share.



Heritage Oil

I was able to catch up with Paul Atherton, HeritagesFinance Director and posed the following questionsto him -

Q.What distinguishes Heritage from its peers?

A.The Company has many competitive strengthsincluding:

a strong balance sheet; a proven management team; strong and established technical expertise with

a history of nding oil and gas; a geographically diversied portfolio of high

impact exploration plays; and

well-established connections in all areas inwhich we operate.

Q.What are the main catalysts that you see on thehorizon for value realisation?

A.2012 will continue to be a very interesting year forHeritage as we have a diversied drillingprogramme and the nancial exibility toaccelerate programme execution in several of our

core areas. In the near-term the main priorities

for the Group are to continue to drive our currentportfolio forward with exploration or developmentand drilling programmes in Kurdistan, Tanzaniaand Malta. We currently have two rigs drilling inKurdistan and are reviewing results from seismiccampaigns that could provide future growth in theportfolio. We are looking to further develop theexisting portfolio and continue to look for valuegenerating opportunities within our core areas.

Q.What options are open to you for the

monetisation of your Miran Field?

A.We consider the Miran Gas Field to be of such asize that it is a commercial discovery andindependent engineering studies have conrmedthe potential for a fast-tracked, phaseddevelopment of the eld, with local gas sales in2013 and full eld development through exportof the gas to Turkey in 2015.

Furthermore, many commentators and analystsconsider there will be considerable M&A and soconsolidation of existing licence holders in Kurdistanwhich is another way to monetise an asset.

Q.What do you say to those shareholders that believethe purchase of the Heritage shares by the companyhas been a monumental waste of money?

A.We are focused on building long term shareholdervalue. This can take some time, but the managementteam has a track record of delivering success and isvery much aligned with other shareholders as we ownover one third of the company. We have personally notsold one share and Heritage has undertaken a

signicant share buy back programme as we considerthe company to be materially undervalued.

Q.Do you have a message for shareholders?

A.The Company has an excellent track record builtover many years, one that we continue to live up to,having found in excess of 2 billion barrels of oil in Africaand one of the largest gas elds in Iraq. Management isvery aligned with existing shareholders and is focusedon rebuilding shareholder value through the existing

portfolio and diversication by acquiring assets in ourcore areas of Africa and the Middle East.

Catalysts

The potential catalysts for value realisation aremulti-fold and could include any or all of the following -

a) Success in drilling the balance of Miran West andMiran East with the presence of oil and gas

b) An accelerated path to market for the major gas

nd in Miran including access to the lucrative gasmarket in Turkey

c) News on the Tanzanian, Maltese, Pakistan and Maliexploration programmes

d) Potential corporate activity - sale of Miran, farm inof the Malta prospect or indeed a bid for thecompany or a transformational acquisition

e) A positive outcome in the arbitration process.



Unloved, forgotten and Undervalued

Cumulativevaluationpossibilities

Taking the gures above weresult in the followingas a potential upside value toHeritage (in p) -

Given recent security issues in Mali and Pakistan we have assumed only nominal value forthese licences. Drilling delays in Malta mean that we have only included 50% of the

Potential value for the Malta licences too.

Technical Picture

Looking at the short term chart we can see the stockis beginning to probe the downtrend from early

February - this comes in around the 150-155p level.A close above here targets next resistance aroundthe 160p level.

A number of consecutive daily closes above 150pwill be the conrmation signal I am looking forthat the stock has broken the intense downtrendin recent weeks.



Heritage Oil

Conclusion

As can be seen from Heritages individual prospectsbreakdown above, news ow this year into 2013will be thick and fast and any number of positiveoutcomes from a sale of the Miran Block throughto drilling success in Malta in particular could cometo pass. The Company has indicated that it has beensearching for material transactions and so couldone of these transformational deals be completed?At the current price of 135p (time of writing) andwith cash and stock assets of almost 100p, westruggle to see any downside whatsoever from

here.

The upside is considerable and this is our secondConviction Buy in this issue. Regular readers will knowmy usual caveat however and that is - be careful on your

leverage (do not gear yourself more than 3 timescurrent surplus cash on your account) and so giveyourself headroom for further market volatility.

In the interests of clear disclosure, I declare myselfpresently long the shares in this company.

A move beyond 165p will likely take us back towards 200p in short order and, as can be seen from the longer termchart will be a decisive break of the longer term down trend from early 2011.

(%)



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Large cap focus

HSBC

Among UK listed banks HSBC is one of the last men left standing. It isdistinguished by exposure to emerging markets and is viewed asrelatively conservatively run. A re-focusing of the group to improve

returns and an attractive dividend ensure we rate the stock a buy.

Few banks come out of the global nancial crisis smelling of roses andHSBC is no exception. However, the strong diversication of thebusiness helped it to weather the storm and it now looks to be wellpositioned versus competitors.

This can be seen by looking at the market leading position HSBC now has

in some areas of UK banking. Although 80% of HSBC revenues do comefrom outside the UK the fact that the group is able to grow lending hereshows that it is not capital constrained.

In the UK mortgage market, for example, HSBC had a market shareof 2.5% in 2007 but lending since then has grown by three-quarters to13.2bn in 2011 giving a 9.6% market share. A cursory glance at the UKmortgage tables shows why with HSBC having market leading rates.

Meanwhile in the UK commercial lending market HSBC made recordloans of 49.4bn in 2011. With competitors having retrenched loanmargins have widened and loan conditions tightened. This ensuresthat HSBCs lending growth looks to be protable.

In the UK HSBCs 2011 prots rose 17% to 1.5bn with top-line income

at at 5.6bn looks to have been due to a 35% reduction in impairments

to 796m.

Meanwhile in the context of the UK ISA deposit accounts marketed by thebanks the stock of HSBC stands out for its superior dividend yield. Theshares offer a 5% yield in the current year with this payment coveredmore than twice by earnings.

The yield is the highest among UK bank stocks while prospects for the

international bank look solid. This is as the shares weakened on theEuropean Sovereign debt crisis which took hold from Q3 2011.



FatProphets - HSBC

In the near term support is located at the technically important 200 day moving average at 537.83p.We would expect the downside to be limited to this level. A sustained break above the 50 day movingaverage would signal a continuation of the uptrend targeting an initial retest of the 587.2p highs.



Large cap focus

With reference to the weekly chart, prices haverespected the 61.8% Fibonacci retracement at the 460pregion. This is bullish, and we would target an eventualtest of the 200 week moving average at 615.95p over

the coming months.

A new strategy for the business was announced in May11 by CEO Stuart Gulliver who was appointed in

January 2011. This will see the business strive toimprove returns by becoming more focused,streamlined and centralised.

The nancial results for 2011 for the business as awhole showed some progress but it is clearly going tobe a long-haul for the group. In the meantime growth

from emerging markets and a return to dividendgrowth supports the stock.

HSBC prole

HSBC denes itself as one of the few trulyinternational banks with retail banking in Hong Kongand the UK. By contrast other banking groups are morelocalised with the US banks generally sticking to NorthAmerica for example.

In 2011 49% of revenues came from faster growingeconomies which compares to 44% the year before.The group expects economies considered as emergingnow to increase ve-fold in size by 2050.

The position in both developing and developedeconomies allows the group to sustain a crisis in eitherrelatively well. This is illustrated by the recent nancialcrisis in the West and also by the 1997-8 Asian nancialcrisis.

CEO Stuart Gulliver is keen to retain this balance andalso points out that it offers benets to the group by

allowing it to support trade and capital ows betweenthe developed and emerging world. Turning to 2011snancial results and the benets of this diversicationare clear.

HSBC 2011 results by region

The above graphic shows that strength in AsiaPacic, MENA region (Middle East and NorthAfrica) and Latin America helped to offset some of theweakness in Europe and North America. Thus protbefore tax on an underlying basis for thegroup was down just 6% to US$17.7bn.

Key markets seeing strength in terms of protsgrowth were China (236% growth) the United ArabEmirates (73% growth) and India (22% growth). One of

the biggest countries for HSBC in terms of prots was

Brazil which produced USD$1.2bn prot before taxafter growth of 13%.



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Fat Prophets - HSBC

HSBC is also diversied by business divisions withweakness in investment banking (global banking andmarkets) offset by retail and commercial banking. Anotable success was commercial banking which sawrecord revenues in 2011 and a leadership position in

global trade.

HSBC results by division

In January 2011 Stuart Gulliver took over as CEO and

he outlined a new strategic direction for the company

in May 2011. This centred around making the business

more focused, setting nancial targets, reducing costs

and centralising control.

Given HSBCs history this approach looks appropriateas the business is currently decentralised which hasmeant incoherence, higher costs, duplication and anunclear strategy across the business. In 2011 16

disposals or closures were announced with three morein 2012.

These included 195 retail branches, mainly in NewYork, the US Card and Retail services business, thebusiness in Costa Rica, Honduras and El Salvador. No

meaningful acquisitions were made in 2011.

Gullivers targets

Key targets set to Stuart Gulliver are for cost efciencyin the range of 48% to 52%. This is the operatingexpenses divided by net operating income before loanimpairment and other credit provisions.

Progress wasnt seen here in 2011 with the gurecoming in at 57.5% having increased due torestructuring costs, customer redress programmesand a UK bank levy. However, there was also theeffect of wage ination and higher staff numbers.

Progress was seen on returns on average equitywhich came in at 10.9% in 2011. However this wasoutside the target gure of 12-15% but it was up1.4% on 2010.

Underlining HSBCs strength its core tier 1 capitalratio was up on 2007 at 10.1%. This is the ratio of thecapital measure to average risk-weighted assets

(RWAs). The gure did increase on 2010 due to anincrease in assets.

Summary and Valuation

Some investors are sceptical towards HSBC, viewingthe companys nancial targets that have been setas not likely to be met. In our view, targets should bedifcult to achieve in order to obtain results.

The medium term will focus on lowering costs andre-focusing the business. The longer-term will seethe group take advantage of emerging market growth

and a re-positioning in developed markets.

The groups dividend was cut in 2008 and 2009 butsince then has been increasing year-on-year. It willbe supported by the return to earnings growth and inany event is covered twice over.

Accordingly, we recommend HSBC as a buy.



Worldspreads

collapse -what youneed to know



There are two types of client classication in the UK spreadbetting and CFD marketplace and these are eitherRetail or Professional designation. Below is a description of these two statuses and what each infers for such aclient.

The sudden collapse into Special Administration on Friday 16th March 2012 of thequoted mid-tier spreadbetting company Worldspreads was a shock to many - bothindustry participants and clients alike. At its heart is the shocking fact that clientfunds, which are supposed to be completely segregated from company funds, were

used by Worldspreads for purposes yet to be made clear. The shortfall runs toapproximately 14m - no small sum and almost half of the then client funds.

Worldspreads collapse

Retail clients funds (dened as cash andunrealised prots) are required by FSA regulationsto be kept in a completely separate bank account tothe companys own funds, and further that they arering-fenced from any creditor claims. Should theunderlying bank itself that holds the funds go intoliquidation then each client would be covered up tothe 85,000 FSCS deposit taker limit as an addi-tional safeguard.

If a regulated spreadbet/CFD rm goes intoliquidation then you are protected, irrespective

of Professional or Retail status, up to the 50,000FSCS compensation scheme limit.

As a Retail client you also have the right of recourseto the Financial Ombudsman Service (FOS) - aservice that provides an alternate complaintsresolution procedure to the Courts and that isentirely cost free on the clients part. If a complaint

is necessary against a rm and you are unable toresolve the issue(s) direct with the Compliancedepartment, then the FOS is a particularlyuseful service that you can turn to and for this

reason alone one should be very careful ofrelinquishing Retail Status.

Retail clients1 Professional client2

The requirements on a rm to classify a client as aProfessional are quite onerous as all individuals aredeemed initially to be Retail and the following itemsmust be fullled in order for the rm to be able to

re-classify them as such:

(a) The client itself must effectively elect to bereclassied and the rm must give written notice ofthe protections that the client will lose, namely theloss of segregated status and the right of recourse

to the FOS. This election can be either generally orin relation to particular services or transactions. Theprocess goes one stage further in that theclient must state in writing that they are aware ofthe consequences of losing such protections.

(b) The rm must undertake a quite extensive

assessment of the clients experience,understanding and knowledge of the transactionsand services they expect to use and the risks

inherent, and have reasonable assurance that theclient fulls this criterion.

(c) At least 2 of the following qualitative criteriamust be additionally satised too:

(i) The client has carried out transactions, insignicant size, on the relevant market at anaverage frequency of 10 per quarter over the

previous four quarters



What you need to know

(iii) The client works or has worked in the nancialsector for at least one year in a professionalposition, which requires knowledge of thetransactions or services envisaged

A Professional Client can request to be re-classiedas a Retail client at any point and, similarly, wherea rm becomes aware that a client no longer fullsthe requirements to be classied as a ProfessionalClient then the rm must re-classify - in practicethis is likely to be a reduction in the Clients portfolio

value below 500,000 Euros.It can be seen, therefore, that the number of clientswho would t the quite extensive requirements to beclassied as a Professional is very limited.

In reality no client would ever elect to beprofessional, but the unfortunate fact is that someclients (or groups of clients) are simply bigger thanthe company that is transacting their business. If aclient has a large sum with a company and then takesout positions requiring a similar sum as margin,then the platform provider must use its own funds

as collateral with the exchange/broker. As you canimagine, a handful of high net worth clients wouldsoon use up all the cash resources of the company

involved. For this reason providers may then takethe route of saying to the client - either agree to beprofessional, or we are unable to transact yourbusiness.

Further measures you can take is to split youraccounts into 2 separate ones if you are marriedfor example, and thus you would have two potentialFSCS 50,000 payout safeguards. Of course, the

ultimate safeguard is not to have more than 50,000invested with any one spreadbetting rm.

www.capitalspreads.com

Spreadbet Magazine joins a growing chorus of othercommentators who are calling on the FSA to tightenthe procedures and reporting requirements by allinvestment rms (not just Spreadbetting and CFDrms) in relation to segregated client funds. As the

Worldspreads scandal has shown, and alsofollowing the MF Global collapse, rules andregulations are all well and good, but if there is adetermined desire by a particular rms staff toignore these regulations there is, in practice, verylittle that can be done. This is why draconian legal

repercussions should be brought to bear on thoseparties that do breach these rules and regulations.

We pride ourselves on our independence at thismagazine, but one rm that currently treats allclients as Retail and so ensures the maximum levelof protection is Capital Spreads. In conversation withthe company this is a consequence of their very strictrisk control systems that require cash onclient accounts (as opposed to credit) to fund theiractual trading, and also their policy of insisting onstop loss orders for all open positions. The

consequence of this is that the whales (the onlyclients who, by failure to honour their debts, aregenerally the biggest risk to companies offering

CFDs/spreadbetting services) do not trade withCapital Spreads and go to their competitors. Thesewhales can of course bring down a rm as in thecase of Global Trader - sometimes it pays to knowwho you are swimming with.



Research in MotionConviction Buy recommendation.Current Price - $13. Price Target -$20

Conviction Buy? Thats a punchy call on whatis currently one of the most hated stocks in themarketplace. What makes Spreadbet Magazine socondent of a rising share price in the much deridedBlackberry maker? The answer is simple -

everything has its price and RIMMs current price isnow too cheap.

We agged RIMM as a potential takeover candidate

in our New Year 10 contrarian bets for 2012feature, and as the year has progressed ourcondence in some type of corporate activity hasgrown. At the current price (at time of writing) of$12.70 the stocks market capitalisation is alittle over $6.5bn. It is entirely debt free, trades on aprospective PE ratio of just 7 times for 2012, a pricetotangible book of just under 1, price to sales of 0.3and price to cash ow of an almost unbelievable2.3 times. In short, the stock is not just cheap itsludicrously cheap.

The stock has been hated for almost 18 monthsnow and there seems no shortage of analystsprepared to bet on its continued demise - perfectpotential contrarian hunting territory for the valuebiased buyer. The announcement on the 6 April

from newly minted CEO Thorstein Heins that thecompany was looking at strategic options -codeword for potential sale of the company, is thecatalyst we have been looking for. RIMMactually has various options open to it to unlockvalue including licensing its software to othermanufactures, entering into JVs with perhaps thelikes of Samsung or re-focusing its efforts on purelythe business sector and abandoning the consumersector, where it is plainly ghting a losing battle andis the primary source of its woes.

Special US Feature

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Research in motion

The Blackberrys primary asset as a handset is itskeyboard feature - as a personal user of the Black-

berry and shortly due an upgrade, it is the easeof typing on the keyboard that will prompt me torenew my subscription to the Blackberry

service. As more afuent users now have 2personal phones, one for business and one forpersonal use, RIMM would be well advised toconcentrate on the business aspect and this is anavenue that it seems management have taken onboard, and indeed are now to focus upon.

The most obvious potential acquirer of RIMM andalso the most appropriate commercial t is of

course Microsoft. With Google and Apple continuingto encroach on Microsofts once seemingly

unassailable entrenched PC software retail positionof their Windows product, a concentration on thebusiness sector seems a likely medium-termdirection for Microsoft. With a cash pile of some$50bn, RIMM is an almost morsel sized acquisitionto them. Microsoft probably wouldnt even need topay in cash, as the company trades on a higher PEthan RIMM. A stock acquisition (in whole or part)pitched around $20 would likely have RIMM

shareholders biting their hands off - certainlyJaguar Financial that has been pressing for a sale ofthe company from the mid $20s and is nowlikely heavily under water.

From a technical perspective, I am gettingparticularly hot and bothered under the collar.Looking at the monthly chart (bottom left) the stockhas re-traced all the gains from 2006 that took itfrom around $15 up to nearly $150 - a shocking

90% drop and, I can count 5 clear waves per ElliotWave theory that typies the end of a trend. On the

daily chart we look to be probing out a classic triplebottom too. All the monthly, weekly and dailystochastics show an oversold situation, and eachtime we touch the $12/13 level volume increasesdramatically - technically, for bottom shers, this isabout as good as it gets.

For those readers who are inclined to agree withour analysis and are looking to trade RIMM on the

long side we would suggest, as ever, that youensure your account can carry at least a further15% downside without causing you sleepless nights

by way of a margin call.



Options Corner

Options Corner -Calendar & Ratio Spreads

Hopefully readers who have previously not been too familiar with options and theirpotential uses are now becoming a little more educated as to how they can beincorporated into their trading strategies. The beauty of options, certainly paid forpremium (as opposed to writing options), is that you know exactly what your downsideis - you pay (X) p for an option and that is your xed risk. Sleeping easy is an importantelement of any spreadbettors life!

Last month we looked at how simple Bull Call &Bear Put Spreads could be used as part of a tradersarmoury to lower the cost of an option when takinga view on a particular stock or index. This monthwe take that one stage further and see how spreadstrategies can be further evolved depending on yourview on how a particular situation may play out.

Let us look at how a Calendar Spread works using,in this example, a Bull Call spread on the FTSE. Atthe time of writing the FTSE is trading around 5600.A trader may have looked at the historical monthlydistribution of returns and barring majordisruptive events such as 9/11, Lehmans etc, themonthly distribution of returns appear to betypically around 2% with the maximum move to theupside being around 12% over the last 10 years.With this data in the background, a trader might be

minded that the FTSE is relatively oversold havingfallen over 400 points in recent weeks and that arally to 5700-5750 is likely in the next week.

Bull Call Calendar Spread

The trader can thus construct what is called a BullCall Calendar Spread through, for example,purchasing the April 5650 FTSE Call at around 35.Now, he may look at the historic monthlydistribution of returns and think to himself, what is

the chance in the next 6 weeks of the market risingabove 6000? If he believes this is slim then he cansell the May 6000 FTSE call against his purchase foraround 12.

Another reason a trader may wish to do this is if heis already long the market through a selection ofstocks and he is happy to see the FTSE rise towards6000 as it will take his stock portfolio up in price. Inessence he is purchasing a xed price (thus knownrisk) long exposure on the FTSE for the

remainder of the period until the April expiry with ashort position on the May 6000 Call (and thereforehedge against his long portfolio) for the remainderof that month.



Calendar & Ratio Spreads

The breakeven level of the strategy is the Long Callstrike price (5650) + the NET premium cost (35 - 12= 23) = 5673. If he purchased say 50 per point, thenet cost to him in premium is therefore 50 x 23= 1,150 - his maximum initial loss. His potential

prot prole is the difference between the strikes(6000 - 5650) less the cost of the option = 327 x 50 =16,350 - in this instance, over a 15 times potentialreturn. Please note - this excludes movement in socalled volatility and the residual theta (time value)on the short call side.

Lets say that the FTSE expires in April at 5800 thusmaking the traders 5650 Calls worth 150. At 50 apoint his bet his therefore value at 7500 - not a bad

return on 1,150.

However, before we retire to the pub with our

prots, we must not forget about the May 6000 Call- this will still have some time value and may, in thisinstance be valued around 30 at the end of April andwith a FTSE level of around 5800.

As the trader is still short of this he then has thechoice of either buying this back to neutralise his

exposure at a cost of 1500 (30 x 50) and thusreducing his prot by this amount or alternately,taking the risk of leaving it to run towards expiry as

time decay will begin to set in - see chart below thatshows how time decay affects an option in the last30 days of its life.

If the trader remains short this option then he willstill have the risk of the FTSE rising above 6000 andthus accruing losses at a rate of 50 per point. Asstated earlier however, if he has a long portfolio ofstocks correlated with the FTSE then he may be

happy to see the FTSE rise all the while knowing

that time decay is working in his favour. Similarly,he could choose to simply buy back half theexposure (25) thus cutting his risk. The beauty ofoptions is that there are so many ways you can playout your view.



Options Corner

Let us look at what scenarios could occur. Ifduring May HSBC falls to 500p then his May 520Puts would be worth 20 (520 - 500p). His prot on

this would thus 14 (20 - 6 cost). This will go someway to offsetting his notional loss on his long stock

bet. Of course, as in the example above, we mustnot forget the Puts that do not expire until Augustthat he is still short. As with the Bull Call Calendarspread, the option could be bought back either inwhole or part or, alternately, run towards the expiryif the trader is prepared to buy HSBC around the460p level (the exerciseprice).

Advantages Of Ratio Bear PutSpread are -

1. A prot can be made even if the underlying stockrises if a net credit is received.

2. A much higher prot can be made than a simplenon ratio Bear Put Spread when the underlyingstock closes at the strike price of the short putoptions at expiry.

Disadvantages Of Ratio Bear Put

Spread are -1. Margin is required.

2. The trader is more exposed to a rise in volatilitythrough his short puts being sold in a greaterquantity than the purchased ones.

Spreadbet Magazine is to produce a

special Guide to Option Spreadbettingduring the next few months. If you wouldlike to receive a FREE copy of this thenplease click here.

The Advantages Of Bull CalendarSpread are -

1. A trader is able to prot even if the underlyingasset stays stagnant.

2. A trader is able to offset losses if the underlyingasset drops in value.

3. Initial losses are limited to the net debit.

Disadvantages Of a Bull CalendarSpread are -

1. Prots are limited even if the underlying asset

rallies.

2. Losses can be sustained if the short call optionsare assigned when the underlying asset rallies.

Ratio Bear Put Spread

Let us now look at the simple concept of a ratio

spread and, in this example, look at a so calledRatio Bear Put Spread and explain just why a trader

may wish to construct this. Lets take HSBC wherea trader currently holds a long position of perhaps100 per point in this stock. At the current priceof 540p with the recent are up of worries overSpains debt prole he might reason that there is afair chance that the stock could fall to 500p over thenext few months. However, if the stock did fall tosay 460p he would be happy to buy more of HSBC.

A trader could therefore buy a May 520 Put for say 6

and sell an August 460 Put for twice the amount forsay 5. The net effect is that he has paid out 6 yetreceived in 10 thus creating a net credit of 4.Assuming this is done for 100 per point on thepurchased side & 200 his short put sale side thenhis account has received a cash credit of 400 (6 x100 cost = 600 & 5 x 200 receipt = 1000).



Commodities Corner

Silver started off 2012 with remarkable gains. After

rising 19.15% in January, the precious metal addedanother 6.49% to its value during February, reaching

the dizzy highs of $37 per ounce - a level not seen sinceSeptember 2011. In March, the precious metal entereda downtrend channel and has been trading within asideways range since the 14th March. As the risk-offattitude came back into the markets on Monday 24 April,silver broke below

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