Trade our Differential Markets
IG Index offers the opportunity to bet on the strength of the FTSE 100 measured against the Dow Jones Industrial Average or the DAX 30.
If you believe that one market will outperform another but don't know if this will be in a bull market or a bear market, you may wish to trade our differential markets.
If the FTSE is at 6000 and Wall Street is at 13000 then the differential mid-price is 7000 (13000 minus 6000). If Wall Street gains more value than the FTSE then this gap will increase, so buying our differential market is a bet that Wall Street will outperform the FTSE. Conversely, selling the differential market – betting that the gap will narrow – backs the view that the FTSE will gain more value (or lose less value) than Wall Street.
Overall market direction does not matter
Even though the Credit Crunch originated from US sub-prime mortgage problems, Wall Street fared better than the FTSE last year, gaining 800 points (6.4%) to London's 240 points (3.8%).
At the beginning of 2007, had you thought Wall Street would outperform the FTSE, you could have placed an 'up bet' on our differential market. The mid-price for this special market at the start of 2007 was 6240, representing the difference in levels between the FTSE and Wall Street. Come year-end, Wall Street had gained a 'differential' of 6800.
Your bet would not have had to endure the same volatility of wider markets in this period and could have delivered a profit even if both markets had posted record gains or indeed slumped – as long as Wall Street gained more (or lost less) in absolute terms than the FTSE.
We offer quarterly differential bets for the FTSE/Wall Street and the FTSE/Germany 30. Bets expire at the absolute difference between both settlement figures on the third Friday of the relevant month. To find out more see our Dealing Handbook
The above comments do not constitute investment advice and IG Index accepts no responsibility for any use that may be made of them.
Updated: 18/01/08