listen, What brokerage will not charge you interest on margin balances? If you can borrow no interest money then yes, you can infact increase the real return but that wont come from the long cash short fut combo but simply from your leverage after you substract the edge loss. Again, if this can be done the way you explain it, then who on earth would risk money for a 10% return? Think about it. Every retired guy will be investing in long cash short fut combos instead of the fixed income instruments. But hey, dont let us stop you, keep looking, if you find an arb out there maybe you can share it with us LOL
You need to put in a few hrs to study future pricing. You still don't understand. Pick up any decent finance book on cost of carry and read a little. However, on the bright side, futures sometimes trade above or below its fair value, giving you an opportunity to arb. The competition is tough, and I am sure you can't compete in this environment as a retail investor. Even with statistical arb., which lowers your break even point on entry and exit, it is still pretty tough and does carry certain risks. Nonetheless, it doesn't mean there's no free lunch out there. The market is efficient because an inefficiency has yet to emerge.
Does futures broker charge interest on margin? I read recently on an other thread they dont. (No need to tell me to return to my books, I know it may look like a stupid question) For the margin on stocks or ETF, yeah broker will charge me interest, my mistake I should have though of that. My last try: what about a synthetic long index instead of the cash index: [long ATM call option and a short put option] (instead of the long cash index) + short future. Keeping few months that combination to collect premium from the future, total margin requirements are lower than [long cash and short future] Could it allow to safely multiplicate the basic risk free interest of 5% ? I am not completly convinced that there is no way to do safely better than a simple CD at 5%, but I am conviced that if there is a way it is not publicaly advertised.
If you trade options, you will find that calls are more expensive than puts most of the time (all else equal). Your synthetic will result in a net debit, which will usually be equal to the futures premium you can collect. I know so b/c I have already checked it. Alot of people often wonder why calls are more expensive than puts...it is b/c calls are priced correctly to prevent arb. opportunities as in the case you have just presented.
These kinds of opportunities do exist. There are many times when cash-futures spread basis goes out of whack. You need to act immediately. You can play this basis in many ways- long/short ETF/futures, or synthetic long/short ETF/futures or vice versa. I personally simply take a naked position in the futures and get out when the mispricings disappear, hopefully collect a few dimes in the process..
In regard to your question on futures margin, the answer is no. Futures brokers do not charge interest b/c nothing is being purchased on margin (you're not borrowing their money). Futures are traded in a margin account, but no money is being borrowed, so no interest is charged. Actually, it should have been the other way around. Brokers should pay us interest for the collateral (the cash deposits) we put into the margin account when we trade futures.
Thanks for that precise answer bvam1, I noticed that too (calls are more expensive than puts) and tried on a saxobank simulated account (where we can adjust the strike price of the option with lot of precision) to create a slightly out of the money synthetic long spot gold using a call and a put that have exactly same cost so no net debit, but I dont know how if it will behave exactily as long spot. (Even if a synthetic was built with exactly ATM options when price move the options are not anymore at the money but it remain a synthetic long, hummm... does it make sense in my friday night English)
Circle, thanks, an interesting post. So mispricing can be played for the duration of the mispricing which is probably of a short duration, but if you take a naked position you take a risk if the index decide to move in wrong direction in such case the correction of the mispricing will not be enough to maintain you in profit. or could it be that mispricing is a very good indicator for the next movement of the index and being naked at that time allow you to make money from both the mispricing and that index mouvement.