I suspect most of the clever guys (banks) with huge trading balances have blown most of all arbitrage possibilities away but I'll keep looking..
There are various little pockets of arbitrage out there, but usually they have to do with some form of risk. To quote myself, "there are no free lunches, just cheap lunches"
Certainly would be an improvement on five pages of "how do I roll futures to the next expiry??"...
LOL, yeah. To close out the rolls and bagels discussion, here is what I told FCT:
Interesting phenomenon, tx for explaining, although I’m surprised by the fact that ‘everyone is rolling short’ as futures are in zero net supply.
I took spooz as an example. Usually this type of shit happens in various back-waters, especially places where shorting is difficult (Thailand, for example). What happens is the various accounts (long/short, quant) are perpetually long stock via rotating inventory. The are holding futures to keep themselves market-neutral. So they are "forced rollers", while the long accounts are usually much more opportunistic - locals, macro accounts etc. Sometimes, a bunch of shorts need to roll and end up shoving the distant contract a fair bit down. Think of it this way; even though for every seller there has to be a buyer, if the seller is trading to open (i.e. adding open interest), the buyers might step out a little.
I’d also imagine that this is an ‘enforceable arbitrage’, since dividend futures and interest rates can be traded to lock in any mispricing.
Dividend futures are only liquid in Stoxx50 (very interesting market, but way too small). SPX has an active div swap market in OTC (which makes it an easy way to get fucked with a chain saw).
On something short-dated like front/second month futures roll, best way would be to trade EFP - you short a basket of stock and carry futures against it. Index arb desks do it all the time, though it's a PIA if you are not set up. However, the reason why rolls are mispriced is exactly because index arb is impossible to do. Forget rolls - in fact, places like China (mainland) has futures mispriced by as much as 20% annualized sometimes and there is no easy way to play it since shorting is so hard.
Is this big enough in your experience to base your decision on whehter to roll or not on? And where do you get data on fair value?
Well, when it is really our of wack, I sometimes would decide not to roll (as I described). There is probably some opportunity to buy rolls early when they are cheap and provide liquidity when the hoards come, but that would be very capacity constrained (like weeks before maybe you can grab a few lots, so you'd make a grand or so).
Modeling fair value for rolls is hard(ish). You need to know dividend projections and dates for all stocks in the index, plus understand the local funding situation - a veritable PIA when you are dealing with some 3-rd world countries.
Cheers
S
