Do futures give you free leverage?

[SoyUnGanador]

I understand that you can get leverage using futures on an index, say SPX, as opposed to just buying SPX. Does that give you free leverage? I.E., instead of having 100% of your account in SPY, could you have [20%] of your account in a long SPX (or SPY I guess) future for the same long exposure, and have the remaining [80%} in an ultra-short bond fund, getting that free interest?

I suspect with 99.99% certainty the answer is no, but thought I would ask. I suspect the future pricing will take that "interest" component into account.

Thanks!!!

 

[FreeGoldRush]

No. Contango will be your enemy. It's the cost the market extracts for giving you the futures contract.

 

[M.W.]

That is not entirely true. Many contracts never or rarely trade in contango and yet allow leverage over cash outlays.

Leverage is never free, it comes at heightened risk. Futures contracts were invented to offer instruments that allow for higher risk-reward vs the cash underlying.

No. Contango will be your enemy. It's the cost the market extracts for giving you the futures contract.

 

[Statistical Trader]

I understand that you can get leverage using futures on an index, say SPX, as opposed to just buying SPX. Does that give you free leverage? I.E., instead of having 100% of your account in SPY, could you have [20%] of your account in a long SPX (or SPY I guess) future for the same long exposure, and have the remaining [80%} in an ultra-short bond fund, getting that free interest?

I suspect with 99.99% certainty the answer is no, but thought I would ask. I suspect the future pricing will take that "interest" component into account.

Thanks!!!

When prices are efficient (virtually all the time for major contracts), the futures contracts will reflect dividends, interest costs, etc. No free lunch. (And by efficient here, I mean efficient with respect to other related contracts, the underlying, etc.)

As far as leverage is concerned, though, yes. You can usually get the leverage you desire through futures. You're just more exposed, as MW says. It's not a free lunch because not only will you profit faster when the market moves in your desired direction, you'll lose faster when it goes against you.

Lastly, as FreeGoldRush says, pay attention to the contango involved when rolling your position forward. With many contracts this won't be a serious issue. With some it will be, though.

 

[Real Money]

Retail clearing does not allow cross margining. Further, the index future is subject to no arbitrage pricing, where the expected dividend and floating funding and borrow rates are involved.

It's actually pretty complicated.

 

[M.W.]

Regarding contango, it only becomes an issue when comparing and targeting a return similar to the underlying cash. Contango or backwardation is only a reflection of the market pricing the future. When a reader closes out a position towards contract settlement then contango does not dictate returns on the position but the entry price does. You then roll it to the next contact cycle by opening a new position and that entry price again dictates the return targeted on the new contract. Contango is only an issue when trying to replicate the underlying cash yield.

When prices are efficient (virtually all the time for major contracts), the futures contracts will reflect dividends, interest costs, etc. No free lunch. (And by efficient here, I mean efficient with respect to other related contracts, the underlying, etc.)

As far as leverage is concerned, though, yes. You can usually get the leverage you desire through futures. You're just more exposed, as MW says. It's not a free lunch because not only will you profit faster when the market moves in your desired direction, you'll lose faster when it goes against you.

Lastly, as FreeGoldRush says, pay attention to the contango involved when rolling your position forward. With many contracts this won't be a serious issue. With some it will be, though.

 

[M.W.]

With cross margin you mean margin offsets between the different cycles? Because portfolio margin actually somewhat mitigates the inability to receive cross margin. Just speaking of retail and those brokers who offer portfolio margin that hits their own balance sheets. Depending on the algorithms, applied, to determine portfolio margin that can be a good or bad thing.

Retail clearing does not allow cross margining. Further, the index future is subject to no arbitrage pricing, where the expected dividend and (floating) funding rates are involved.

It's actually pretty complicated.

 

[Real Money]

With cross margin you mean margin offsets between the different cycles? Because portfolio margin actually somewhat mitigates the inability to receive cross margin. Just speaking of retail and those brokers who offer portfolio margin that hits their own balance sheets. Depending on the algorithms, applied, to determine portfolio margin that can be a good or bad thing.

We need like a real professional broker or someone who has worked in the industry to talk about it. But, basically under Reg-T your cash is available EACH day. That cash is available for margining under Regulation T OR SPAN but not both in the same day AFAIK.

Maybe @Robert Morse or @bone can speak more about it.

 

[bln]

Index futures like ES, etc. got a built in cost-of-carry. The contract price will by time start to deviate more and more from spot SPX for each day that passes.

If you are long the futures contract you pay this cost-of-carry interest. If you are short the contract you receive the interest.

 

[SoyUnGanador]

Thanks everyone. I figured it could not be "free". Leverage is valuable, so a person selling the future should want to charge for it. Also, the person selling the future has to cover the risk that the greatly leveraged product increases (or decreases based on the future) hugely, which costs something (or they have to bear that increased risk themselves and should get compensated for it). So it all makes sense that they should have a cost.