Futures vs Spot price for buy and hold strategy of Bonds

N

Nym

I am reporting here a discussion that has been initiated in another thread. I do not want to mess the other discussion with this "lateral issue "

Is it possible to replicate the buy and hold strategy with the Futures?

One of our fellow suggested the following:

"The only way I can think of replicating this strategy is by rolling over every three months. Not exactly the most exciting prospect."
 
we had this same conversation about SPY vs ES longterm. The general consensus was SPY was better. You would think it would be the other way, considering the margin, but that doesn't seem to be the case all things considered. Not sure if it's as simple as putting up a chart of ZN vs BND, you'd need a calculator in there somewhere. OK, that's all I know, I'll leave it now up to more knowledgable posters.
 
Quote from Nym:

I am reporting here a discussion that has been initiated in another thread. I do not want to mess the other discussion with this "lateral issue "

Is it possible to replicate the buy and hold strategy with the Futures?

One of our fellow suggested the following:

"The only way I can think of replicating this strategy is by rolling over every three months. Not exactly the most exciting prospect."
More...
Buy and hold what? Yes, you can implement the buy and hold strategy for futures by buying and holding futures, but something tells me you knew this already.

If you're talking about buy and hold in the context of what's classically known as a "cash-and-carry" trade, then the answer is no. You can't do it without actually physically buying and holding the asset. The physical act of buying and holding is significant in this particular case.
 
mmmm I think that I got it (thanks). A couple of follow up questions:

a) let's assume that I buy in september a future with delivery december. Let's also assume that I will sell it just before the settlement. What will I earn (or loose)? Will I earn something for holding the future for 3 months?

b) Can I implement the cash and carry strategy using options?
 
Quote from Nym:

mmmm I think that I got it (thanks). A couple of follow up questions:

a) let's assume that I buy in september a future with delivery december. Let's also assume that I will sell it just before the settlement. What will I earn (or loose)? Will I earn something for holding the future for 3 months?

b) Can I implement the cash and carry strategy using options?
More...
if you buy in SEP and sell in DEC you will either make or lose the difference between your purchase price and your sale price. That's all, nothing more.
 
yes, old time that i know. I am try to understand and give a meaning to this difference in order to identify the key factors that may influence that that number...

example, if you are long and the underline move from a 5% to a 6% interest rate will the future still be a bit profitable?
 
Quote from Nym:
mmmm I think that I got it (thanks). A couple of follow up questions:

a) let's assume that I buy in september a future with delivery december. Let's also assume that I will sell it just before the settlement. What will I earn (or loose)? Will I earn something for holding the future for 3 months?

b) Can I implement the cash and carry strategy using options?
More...
a) Well, yes and no... Because you have bought the December future, which is equivalent to buying the underlying forward (for December delivery), you have effectively already "earned" the carry. On the other hand, you are likely to earn the "rolldown" (sometimes called "slide"), which will be dependent on the shape of the curve.
b) No. The "cash" in "cash-and-carry" is referring to the cash you actually pay to own the asset. If you haven't paid the "cash", you ain't gonna be getting no "carry". It's as simple as that and there's no way around it.
Quote from oldtime:
if you buy in SEP and sell in DEC you will either make or lose the difference between your purchase price and your sale price. That's all, nothing more.
More...
Wow, what an incredible insight... Clearly, a superior intellect at work here.
 
let me see if I got it right:

still having the same example where you buy in september the future of december and you sell it in december:

Let's assume the following:
Ui = value of the underlining at inception
Us = value of the underling at selling
Ri = roll down at inception
Ii = interest rate at the inception

a raw estimation of the profit/lose of the tread (holding for n days) will:

Us - Ui +(Ii+Ri)n/360

in the case of an increase of the yield: Us will decrease and you will loose money if it will devaluate more then the carry +the rolling down
 
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