Medium Term- Index Futures vs. Stock Basket

Discussion in 'Trading' started by SB10V, Jun 28, 2008.

  1. SB10V


    Is there any reason to prefer index futures vs. a basket of stocks which represents that index (or vice versa) for a medium term investment (months up to 2 years)?

    At a stock basket I like the variable position size, the dividends, and there's no need for rollovers.

    But regarding the costs: How does the interest paid on the margin for stocks compares to the costs of a future contract (margin + shrinking "time value")?
  2. For long postions index futures are better for holding periods less than 1 year due to lower cost of carry and taxes. Holding periods of more than 1 year favor the stock basket due to lower long term capital gains taxes.

    For short postions index futures are better for all holding periods due to lower cost of carry and taxes.

    The interest rate used to compute the futures premium is well below what you would pay for stock margin. The premium also subtracts out the dividends that you will not receive. You get paid interest on your stock index futures margin if you use the right futures broker and have a large enough account.

    Index futures get 60/40 treatment no matter the holding period or long or short.

    You will have to pay commissions and the spread to roll the futures every quarter.