collecting premium for a risk free 2 digit return

Discussion in 'Index Futures' started by parisd, Jun 26, 2006.

  1. parisd



    I am not offering any solution but just trying to have your opinions about collecting risk free at least 10% a year using short futures versus Long cash or EFT

    The propositions I have read or thought of are:
    - Buying gold (or Silver) cash and selling Gold (or silver) futures contract to collect the future premium, keeping the short future up to 1 day before expiration.
    - Buying cash Index and selling Index futures contract (or index EFT) to collect the premium , keeping the short future up to 1 day before expiration.
    - Buying a short term expiration commodity future and selling same commodity long term futures contract to collect the premium , keeping the short future up to 1 day before expiration and rolling the Long future month after month.

    There is a cost (daily interest) to carry cash index or cash precious metals, so return may be significantly reduced. I dont know of any other cash instruments available to retail investors.

    No cost to carry ETF but margin is 50% so expected return will not reach 10%.

    With currencies, I beleive there is no way as the interest differential is already incorporated in the future.

    The idea of interest free forex account is good but irrelevant for large accounts and long term transactions, account will be flaged as there is no free lunch from any forex brokers.

    Any better alternatives ??????

  2. zxcv1fu


    Do a less risky/cost calendar spread instead.
  3. parisd


    I dont know of a less risky than risk zero

  4. bvam1


    Have you done a research on fair-value pricing of future premium, yet?

    Premium (or cost of carry) = Risk free interest rate - dividend

    So, buying ETF and selling future to collect premium would be the same as putting your money (money you use to buy ETF/cash) into risk free interest rate. As of today, it is a single digit return.

    Your method is the very basics of finance taught in business school.
  5. yes, if you want returns above short term treasuries then take some risks.

    cost of carry is build into the futs. investing 101
  6. Futures of physical commodities have a cost of carry in addition to the interest rate. You probably could get a return greater than just interest if you own physical gold (coins), kept the gold in a safe deposit box, and then sold gold futures against it. Some commodities have rather large carrying charges. Nat gas comes to mind, because it is so difficult to store (unlike gold, you really can't hoard it).

    Problem with selling futures against what you own is that you could easily lose much more than you'd get if prices collapse. It is the same problem that comes with selling bull premium (I hate the term "covered calls," because you really aren't covered much if the stock/future craters).

    There is no free lunch, I am afraid, other than the band going by that very name. :)
  7. parisd


    yes cost of carry is included in future (thanks!) and decreasing until expiration, this is why I try to sell it and buy it back later being during that time long spot as a full hedge.

    Normally I should not get a 2 digit return with any of these basic methods except that I can leverage spot to 1:50 or more or I can leverage index EFT to 1:2 and low future margin requirements are also helping me to multiplicate the return.

    This is what I am trying to ask if it can be done; to transform a risk free 5% a year in 10 or 15% a year using leverage.

    Not saying this is a new idea or trying to be smart, just trying to find people that do it sucessfully and with which instruments.

  8. parisd


    "As of today, it is a single digit return" perfectly right but buying index ETF on margin I can get double of that single digit return and reach 10%, no?

  9. MTE


    You're not getting the point here, this whole thing is priced in, there's no way to make the extra return. If it was that easy everyone would be doing this!
    #10     Jun 27, 2006