Newbee question. Please explain me the risks of the following strategy involving index futures.

[Kust]

Hello.

Currently, I am thinking about doing the following:
1. Buy Utilities Select Sector SPDR Fund (XLU).
2. Sell short an equivalent number of E-mini Utilities Select Sector (XAU=F) index futures to hedge against the price drop.

It looks like a risk-free way to collect dividends 3% per year minus taxes.

What's the catch here?

 

[globalarbtrader]

Hello.

Currently, I am thinking about doing the following:
1. Buy Utilities Select Sector SPDR Fund (XLU).
2. Sell short an equivalent number of E-mini Utilities Select Sector (XAU=F) index futures to hedge against the price drop.

It looks like a risk-free way to collect dividends 3% per year minus taxes.

What's the catch here?

The price of the index futures will include dividends and interest rates. You'll earn precisely nothing (ignoring taxes and comissions, and assuming there is no cash/futures arbitrage).

GAT

 

[Kust]

The price of the index futures will include dividends and interest rates.

How? It is not options.

As I understand, the price of the index futures depends on today spot index value only.

Say, yesterday was ex-dividend day. Today the price of index ETF drops somewhat and the value of index futures drops the same. So no change in the overall value except for the dividends collected, if exclude futures bid-ask spread.

What is wrong here?

 

[xandman]

The futures curve will be discounted to reflect the estimated dividends. The discount is applied to the whole futures curve over time. It will also be buffered to the downside.

Over the medium to long term, your offsetting positions will be a wash less the "carry" you pay for the Futures over time.

If it looks like a free lunch, your missing something. People will sell their mother for a fraction of a percent.

 

[Kust]

The futures will be discounted to reflect the estimated dividends

yes, now I see it, thanks

 

[Girija]

Search for dividend arbitrage. You need a combination of cheap option and a high dividend on underlying to get this to work in ur favor. Don't use futures.

 

[murray t turtle]

Hello.

Currently, I am thinking about doing the following:
1. Buy Utilities Select Sector SPDR Fund (XLU).
2. Sell short an equivalent number of E-mini Utilities Select Sector (XAU=F) index futures to hedge against the price drop.

It looks like a risk-free way to collect dividends 3% per year minus taxes.

What's the catch here?

%%
HALF right/most likely, collect the dividends.
NOTHING is risk free+ add a bid/ask spread /oops; add 2 bid asks of
them like you did= /Oops/oops. But the dividend yield also is not risk fee/ may beat inflation this year with that +may not beat inflation in 2021. Good volume

 

[newwurldmn]

%%
HALF right/most likely, collect the dividends.
NOTHING is risk free+ add a bid/ask spread /oops; add 2 bid asks of
them like you did= /Oops/oops. But the dividend yield also is not risk fee/ may beat inflation this year with that +may not beat inflation in 2021. Good volume

are you senile? The question was answered succinctly above and an hour later you post a completely inaccurate and irrelevant rambling.

 

[Nobert]

The question was answered succinctly above

Ditto situations happens all the time. Sometimes folks just don't read previous posts before they answer (including me)

an hour later you post a completely inaccurate and irrelevant rambling.

Everyone is participating best to their abilities (most of the time). That's what makes this forum enjoyable.
Criticising others - creates an opposite atmosphere.

 

[newwurldmn]

Ditto situations happens all the time. Sometimes folks just don't read previous posts before they answer (including me)


Everyone is participating best to their abilities (most of the time). That's what makes this forum enjoyable.
Criticising others - creates an opposite atmosphere.

He’s specifically spouting misinformation.