Take a Punt on the Santa Rally

I’ve just told my young son Santa doesn’t exist but he says he knew already. iPads have a lot to answer for.

While Santa may not exist, the so called Santa Claus rally definitely does. Indeed the last three years I’ve made a few quid out of it.

What’s amazing about the last three years is all you had to do was place a bet on the FTSE 100 to go up  for the last ten trading days of the year to make money. What’s even more amazing if you look back at the last three years you’d have got quite easily 300-400 points upside each time. Assuming you’d held firm. If history repeats itself this year then it could be in the bag again.

Usually the first ten trading days in December aren’t so good, the market tends to go down. Newspapers often report the “Santa rally hasn’t happened” but that’s usually false. Consider the Santa rally really being just the last few trading days.

I usually quit the trade before New Year’s Eve - maybe the day before. Sometimes it starts to drift before the year end itself.

Best way to play it?  I use a  spreadbet. In other words I have the equivalent of a bet on it with a spreadbet firm, the equivalent of a bookmaker.

If you’d just put on a tenner a point the last three years you could have made 12 grand.

And now the warning! After all there is no such thing as a free Xmas lunch in the markets! The FTSE has topped out around 7,100 a few times. What if the market is around 7,100 as we hit the last ten days? Could it really zap up another 400 points? Best hope is a FTSE fall leading to the last bit of December.

And of course this could be the year it doesn’t happen! So it has to be considered the same as sticking some money on a horse. The good news is you can only lose a specific amount - not more than you can afford.

How do you do it? You have to sign up with one of the many firms. Deposit some cash. Then you bet “per point”. So let’s say the FTSE is 6,500. You bet £1 per point it will go up. Every point it goes up you make a quid. Every point down you lose a quid.

Say it goes up 400 points - 6,500 to 6,900 and you close the bet, you make £400. (400 times £1). But if it went down 400 points you’ve blown £400. But if you are careful and clever the loss should not be that much. That’s because the good thing about spreadbetting  is you can set a “guaranteed stop loss”.

So on placing the bet you click a button saying you want the bet to be closed, say 150 points down max. So if the FTSE fell to 6350 they would close the bet and you would lose £150 - but that’s the maximum you could lose whatever happens! Or in other words you couldn’t do your complete brains if a massive political event or something happened.

Costs of the bet? Well, profit is tax free. You pay a small amount every day to keep it open but just small change. So in my example above you’re effectively putting up £150 (max loss) for potential decent upside, say a win of £400.

I use two firms for this usually -  www.spreadex.com/nakedtrader and www.spreadco.com/nakedtrader.

I would suggest you make sure you really know how to put the bet on before doing it - so maybe a read of my chapter on spreadbetting in my book Naked Trader Edition 4.

And don’t go crazy: just make sure you can really afford to lose the money if the bet hits the buffers. There are no guarantees. And if you didn’t put on a stop loss and the index fell heavily your losses are unlimited.

Why is there often a Santa rally? I don’t have a clue. Lots of conspiracy theories abound though I tend to believe in the cock up theory especially if the Mrs is around. Some say fund managers push it up to get a better year end return or just low volumes near year end. Well, really who cares why?

Have a lovely Xmas season - I’m off to Dubai and hope this year the Santa rally pays for the trip again.