Trading British American Tobacco

One of the perennials of the stock market, British American Tobacco (BAT), is trading at a good profit despite the continual attacks on the industry and its effects on people’s health. When you are spread betting on it, arguably you are not supporting the trade, particularly if your analysis suggests a short position. Here is a monthly price chart showing consistent progress, with only a minor blip during the world economic crisis.

Trading British American Tobacco

In fact, tobacco companies have always been an issue for “ethical investors” because their operations are aggressively expansive, and therefore the companies tend to be successful. BAT is the second-largest tobacco company in the world, after Philip Morris International, and operates in more than 180 countries.

The company was founded in 1902 as a result of a joint venture between the Imperial Tobacco Company in the UK and the American Tobacco Company of the US. It has expanded into many different markets, following the unfavourable treatment of tobacco companies in its established areas, and as the world economies have revived the profits have increased, with the company selling about 350 billion cigarettes last year. The largest current markets are in South Africa, Australia, Canada, Brazil, and Russia.

One of its latest headaches is the Nigerian government which filed a lawsuit a few years ago for billions of dollars to cover the future cost of treating Nigerians who are afflicted with illnesses caused by tobacco. Even BBC2 broadcast a documentary about bad advertising practices, with younger Africans being targeted specifically, taking advantage of the lack of education about the health risks.

That aside, the daily price chart shows good volatility and tradable trends, so this company is a good prospect for spread betting. Checking a daily chart will show you the prevailing short-term trend, and it is a good idea to align your trades with the strength of the market as shown by these moves. The long-term trend is upward, but this does not prevent the share prices exhibiting downtrends for a month or more.

British American Tobacco Rolling Daily

The current daily price chart, shown below, indicates that the price is at a decision point, the middle of the Bollinger Bands. The MACD below is bullish, although there is a hint that the strength may be failing. With the doji candlesticks, your best course may be to wait and see which way the price breaks. However, if you’re impatient you may choose to place a long bet for £3 per point at the current spread betting quote of 3201.8 – 3209.2.

British American Tobacco Rolling Daily

If the price breaks in your direction, you can expect it to rise to the upper Bollinger Band, just over 3300. Say you close the bet when the quote is 3295.6 – 3301.7. In this case you have ridden the trend from 3209.2 up to 3295.6, a gain of 86.4 points, for a profit of £259.20.

But if you took this course, you shouldn’t be surprised if the bet loses, as there is no good confirmation of the direction of the move at present. Say you watched it go down to 3132.9 – 3140.3 before you closed your bet and accepted your loss. Your starting price was 3209.2, as before, and this time you closed at 3132.9 for a loss of 76.3 points. For your chosen size of stake, that means you lost £228.90.

Many traders choose to use a stop loss order to cover their losing trades, closing the bet for them if it reaches a set level. The stoploss order is normally placed at the same time that you open the bet. In this case with a stoploss you might have found that the bet would be closed for you when the price went down to 3145.2 – 3152.6, closing the bet earlier and saving you a little money. Working it out, in this case you would have lost 3209.2 minus 3145.2 points, or 64.0 points, which works out to £192.

British American Tobacco Futures Based Bet

If you think that the price of BAT shares will continue to rise, but that it might take a few weeks or months for a reasonable gain, it you could look at placing a futures based spread bet on the shares. The current price for the far quarter is 3219.2 – 3231.7. Though there is a larger spread with a futures based bet compared to a rolling daily bet, you will not be charged any fees for rolling over the bet each night. If you are bullish, you might stake £2.50 per point at the buying price of 3231.7, wagering that the price will go up.

As a first example, assume that you are right and that the price goes up to 3405.3 – 3416.2, when you decide to close your bet and take your profit. Working out how much you have won, your bet was opened at 3231.7, and you closed it at 3405.3, the selling price. 3405.3 minus 3231.7 is 173.6 points. Multiplying by £2.50, you find that you have won £434.

Secondly, we look at the case of a losing bet. Perhaps the quote goes down to 3097.6 – 3108.5, and you decide to cut your losses and close the bet. The starting price again was 3231.7, and the closing price was 3097.6 this time. The difference is 134.1 points, which at £2.50 per point amounts to a loss of £335.25.

One way that sometimes helps to reduce your losses, should your bet go the wrong way, is to have a stoploss order in place which instructs your spread betting broker to close the bet for you. You might find that the bet closed at 3137.5 – 3148.7 using a stoploss order. Taking 3137.5 away from the starting price of 3231.7, in this case you have lost 94.2 points. The cost to you is £235.50.

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