Leveraged investing

Discussion in 'Index Futures' started by thisisbabak, Mar 30, 2007.

  1. I wanted to ask the experts here a question regarding leveraged investing. Consider the following two alternatives to investing in the S&P 500, and suppose the index is at 1,420.

    1. Long 500 SPY shares at a cost of roughly $71,000 ($142 * 500)
    2. Long 1 ES contract (post $35,500 margin) and invest the rest in T-bills.

    Note that the reason you are posting $35,500 margin is to achieve 2x leverage. Now observe that alternative 1 provides the same payoff as going long one ES contract – that is alternative 1 and 2 are equivalent except that alternative 2 earns additional risk-free yield because it has $35,500 invested in T-bills. In this example, alternative 2 would earn half the risk-free rate above the index return, with the same amount of risk (as measured by standard deviation and max loss). Of course now you can increase the leverage by posting less margin and increasing the risk-free yield pickup.

    What am I missing here?

  2. dozu888


    futures are sold at premiums with interest and dividends factored in.

    there is no free lunch on wall street baby.
  3. as someone mentioned, long es will cost you premium. if you want to make premium, sell es, the sooner the better, assuming it goes down from the time you sell.
  4. ???...........the shares payout dividends too.