Free cash?

Discussion in 'Trading' started by Locutus, Mar 4, 2011.

  1. Locutus


    Since there's no such thing as free money I must be missing something.

    What if you: Short Inverse ETF + Short Underlying, manage the trade in such a way that exposure to price volatility is a bare minimum (unless you are into that sort of thing), make sure that whatever you short pays very low dividends and is cheap to short (S&P500?) and you stick the proceeds of the sales into some interest earning low-risk instrument (at least more than divvy yield). Wouldn't this work reasonably well in all cases because S&P div yield is practically never more than treasury yield?

    Someone explain to me why this isn't possible please.

    Edit: The only way this blows up is if you take massive losses on whatever you stick the cash into or the underlying explodes overnight (which is practically impossible in the case of the ES for example, will always be enough liquidity to cover your ass). Extra upside could be caused by the short ETF blowing up completely (I don't trust those things) although then you would have to unwind the whole trade so it's not that positive, the interest rate goes up explosively and you take massive losses on where ever you stuck the money.

    So this strategy would work best in a high inflation environment (where the market has priced in inflation anyway) but should not cause any adverse effects in other market conditions.
  2. 1) The ETF may be "hard to borrow". :(
    2) The correlation and convergence between the two instruments may not be as "tight and predictable" as you hope. You can be hurt by "tracking error". :eek:
    3) You will tend to lose money slowly instead of quickly, from a "blow up". :mad:
    4) There will always be other traders who can borrow more cheaply than you can and short-sell more easily than you. You're always getting to the party too late with that "trade". :cool: