Losing contango

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nzbryant

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I want to use the DJ Eurostoxx futures on Eurex to trade the underlying index, but my analysis shows I will always lose out - because of the amortisation of the contango. The futs begin higher than spot, them move towards spot at expiration. If I am always in futures, day to day I will lose money from the contango declining.

Is this true? And if so, why does anyone trade futures - unless there is backwardation (futures less than spot)?
 
Quote from nzbryant:

All

I want to use the DJ Eurostoxx futures on Eurex to trade the underlying index, but my analysis shows I will always lose out - because of the amortisation of the contango. The futs begin higher than spot, them move towards spot at expiration. If I am always in futures, day to day I will lose money from the contango declining.

Is this true? And if so, why does anyone trade futures - unless there is backwardation (futures less than spot)?
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Futures players try to be in a position which is favorable for a relatively quick move, so premium degradation doesn't enter the decision significantly.

Also, being short would benefit from premium decline except for short term trades.
 
Remember that you will sacrifice the risk free interest over time when you buy the underlying. The futures obviously price in the interest/dividend net which usually results in contango. The small cost of securing the futures contract allows you to "keep" the interest.
 
Quote from nzbryant:

All

I want to use the DJ Eurostoxx futures on Eurex to trade the underlying index, but my analysis shows I will always lose out - because of the amortisation of the contango. The futs begin higher than spot, them move towards spot at expiration. If I am always in futures, day to day I will lose money from the contango declining.

Is this true? And if so, why does anyone trade futures - unless there is backwardation (futures less than spot)?
More...
Usually there's contango in futures, that's normal, due to cost of carry.

How much is the contango in Eurostoxx? Contango is usually 4% per year or less, peanuts compared to options time decay.

By the way what will make your trade win or loss is the movement of the underlying index (directional trade), if you adequately forecast that movement, and invest accordingly, the profits made will be large and the contango loss will be insignificant.
 
Futures have free leverage. The interest you make on cash by not having to put up 100% margin should offset the premium erosion.

Stock index futures don't earn dividends, either. So the futures are marked up for interest carry, but marked down for dividends. If the dividend yield on the index happens to be greater than the risk free rate, the index futures should move into backwardation. You did see that briefly with the S&P 500 a few years ago when the risk free rate was about 1%. The way things are going, maybe we will see it again soon.

If you have a 100k account, buying 100k in cash of an index fund, or buying 100k of notional value of futures and earning interest on the remaining cash balance should, in theory, offer about the same total return in the long run. In the short term there would be an arb opportunity if the two get out of sync.
 
Thanks for the intelligent replies. The strategy I tested showed a 15% difference between the ETFs (or index) and the futures over the last 6 months - when they should be close to the same as each other.

I think maybe it could be because the ETFs open at 9am CET Europe and close at 5pm or thereabouts, while the futures on the same index trade from 7.50am CET to something like 22:00. My strategy involves buying at open and selling at close, so that would cause a difference between the same strategy on the two securities.

I dont know why the difference should always be in the loss making direction though for futures - as would be the case for amortising contango. The contango is not as much as 15% - but again - I wonder why the futures underperform.

Its not commission - I tested with no commission for each security type. They are both very liquid also.
 
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