So I found this old thread because I'd been thinking that, as Poole stated, with little to no time decay you could beat the market by buying a couple of ES contracts to match your account size and then use the remainder to invest in safe fixed income assets (e.g., I don' t know how "safe" it is, but Interactive Brokers private placements currently yield 7%). So, I looked at the price premiums between the March and June contracts over the S&P (which I've attached). Sure enough, there's a price premium on 12/24/07 of 10 pts for the march contract and an additional 10 pts for the Jun contract. However, by close on 2/22/08 the premium has shrunk to 2.4 pts for the Mar contract and an additional 2.8 pts for the Jun contract. So the Jun contract is valued at only slightly more than 5 pts above the S&P Index. Why would the premium be so low for a contract that expires 4 months from now? Am I missing something here? In fact, the Mar 09 contract closed only 10 pts above the index. Also, if the time decay is as high as 4 pts/mo (I think the number is closer to 2) you're talking about 3.5% decay per year that you have to make up with fixed income assets. I think you could still beat that and in effect beat the market, no?
I'm assuming that it's the 4:15pm EST close, though I'm not certain. Also, for the 13 days from 2/5/08 thru 2/22/08 the premium of the Jun 08 over the Mar 08 is within a narrow range of 2.25 to 2.75 pts, so I don't think that it's an anomaly where the ES made a huge move right after the close of the equities market.
Thank you for sharing your obvious wealth of experience in this area. Allow me to reciprocate... It's 'dividends', not 'dividens'. M
That is exactly the strategy I have been using in my Journal. This year is my 3rd and yes, I have been beating the market for 3 years in a row. Basicly if you are able to sidestep into cash just once when the market is falling, whatever the market fell you can lock in when you go long and keep it for the rest of the year. About decay. By last Friday the decay pretty much disappeared and the futures were almost matching the cash although there is still a month left for expiration. Anyway, let's do the math! 13 or so points quarterly is 52 points annually, that's how much you gonna lose by being long all year long. But since 1% is 14.7 points right now because the market started the year at 1468, that is only 3.5% loss, so if you can get a return of 4% on the rest of your money, you are AUTOMATICALLY beating the market by 0.5%!!!
Well, the idea is/was that you are being long ES futures, except a few times when you are trying to time market downturns. Thus when the market falls, it goes down without you being long. Your relative gain compared to the market is how much the market falls without you. I am not sure why the time premium has dropped so much, maybe negative expectation from the futures traders.
For stock index futures, although they have a cost of carry and tend to decline over the life of the contract, there is also a natural rise in stocks. So in effect, they somewhat neutralize each other.