Limited Risk Trading: Indices

Use Guaranteed Stops to limit your risk on stock index trades. You specify an absolute level at which your position will be closed should the market move against you.

When you use a Guaranteed Stop a premium is added to your opening price as risk protection. The Limited Risk premiums which apply to individual stock indices are listed in the Contract Details.

The margin requirement for a Limited Risk trade is equal to the amount which would be lost if the Stop were triggered, plus 10% to cover any interest or dividend adjustments.

Example: Shorting Wall Street with Limited Risk

You want to go short but are concerned about the possibility of a short-term rally.

Opening the position

It is 23 October 2008 and our quote for Wall Street is 8554/8558. You decide to sell one contract with Limited Risk protection. (One contract is the equivalent of US$10 per index point.) So your position is opened at 8554 (the bid price) minus 4 (the Limited Risk premium) = 8550.

Placing the Guaranteed Stop

You decide to put your Guaranteed Stop at 8610. So the most you can lose on your position (excluding interest and dividend adjustments) is:

Maximum possible loss (excluding adjustments): 60 points x 1 contract x US$10 per point = US$600

Triggering the Guaranteed Stop

Steady falls for Wall Street prove your trade correct, but on 28 October 2008 the index rallies and our quote rises to 9129/9133. Your position is automatically closed out at 8610. You have lost $600, but the Limited Risk protection has saved you from a bigger loss, potentially more than $5000.

To calculate the overall result of your transaction, you also have to include interest and dividend adjustments. In this example, you are holding a short position, so your account is credited to reflect interest adjustments and debited to reflect dividends.

• Forex Example
• Limited Risk Forex
• Stock Index Example
• Limited Risk Indices

• About CFDs
• What is a CFD?
• Why IG Markets?
• Risk Management
• CFD FAQs