Risk Free Challenge!

[misterkel]

You're basically trading interest rate (in equities)... you've locked in a certain rate by long spot vs short future. The convergence is just the release of the interest over time.

While it's virtually riskless in the sense you're hedged on market movement... the only reason you would do a strategy like this is if you think interest rate is too high. Or, if you think a dividend will be paid before expiry, which isn't included in the future pricing at this time. So there is financing and dividend exposure.

Also, I think (like SLE says) for retail this involves a decent amount of financing and financing risk. If leveraged, the financing rate will be a lot higher than what you lock in with the (risk-free) future rate. Even if not leveraged... having to buy multiple stocks in certain quantities will mean a decent cost, I think you're better off just buying T-bills for the same or better return.

Just to clarify... a risk-free strategy which pays a less return as inferior when something better is available. So, you could argue... hey, T-bills are risk-free!!! But that's not what I meant by this thread... (and, even T-bills are not really risk-free, since blablabla)

If you're talking about commodity futures... than there's a whole lot more risk involved.

Okay - thanks for that. I still don't see why this is an interest rate play if you're not leveraged.
Unless you're saying that you receive an interest rate just for being long cash in a brokerage account (or T-Bills - 1%) and this play is to beat that.
Anyway - the setup I've seen is on a crypto platform - Bitmex - Dec. futures for ETH run about 11% above spot - without leverage. Annualized, that's above 50% roi (entering the trade now.) BTC futures are about 1.8% above the swap rate.

Aside from slippage, do you see risk in this play? You would have to go long ETH offsite. You've hedged out exposure to ETH, there is no interest rate on the play anywhere, transaction costs are .01%.

 

[Sig]

Okay - thanks for that. I still don't see why this is an interest rate play if you're not leveraged.
Unless you're saying that you receive an interest rate just for being long cash in a brokerage account (or T-Bills - 1%) and this play is to beat that.
Anyway - the setup I've seen is on a crypto platform - Bitmex - Dec. futures for ETH run about 11% above spot - without leverage. Annualized, that's above 50% roi (entering the trade now.) BTC futures are about 1.8% above the swap rate.

Aside from slippage, do you see risk in this play? You would have to go long ETH offsite. You've hedged out exposure to ETH, there is no interest rate on the play anywhere, transaction costs are .01%.

The very real probability that Bitmex gets hacked or goes under is your risk here. Which of the leading bitcoin exchanges from 5 years ago are still around? Can you imagine if stock exchanges and clearing firms had that kind of failure rate?

 

[misterkel]

The very real probability that Bitmex gets hacked or goes under is your risk here. Which of the leading bitcoin exchanges from 5 years ago are still around? Can you imagine if stock exchanges and clearing firms had that kind of failure rate?

Yeah, I nearly included that. Exchanges have vastly improved security. Comparing 5 years ago exchanges to current ones is not meaningful. Advances in security are huge. Have they learned their lessons? Yes, in most cases.

Considering brevity of trade (enter 2-3 weeks out), leveragability (up to 100X), and robustness of platform (it's quite sophisticated, use 2fa, etc.) I would consider this risk to be small - you can do a lot with a little, so use say 20 X leverage for a comfortable cushion if the trade goes temp against you.

So assuming the exchange doesn't get hacked, is there risk in the trade itself?

 

[Sig]

Yeah, I nearly included that. Exchanges have vastly improved security. Comparing 5 years ago exchanges to current ones is not meaningful. Advances in security are huge. Have they learned their lessons? Yes, in most cases.

Considering brevity of trade (enter 2-3 weeks out), leveragability (up to 100X), and robustness of platform (it's quite sophisticated, use 2fa, etc.) I would consider this risk to be small - you can do a lot with a little, so use say 20 X leverage for a comfortable cushion if the trade goes temp against you.

So assuming the exchange doesn't get hacked, is there risk in the trade itself?

As long as you use leverage there's the risk that you get liquidated in a margin call. Otherwise if you discount exchange failure and don't use leverage it would be "risk free".

 

[newwurldmn]

You can create risk free opportunities if you finance differently from the market.

You can also create true risk free opportunities if you have legal structures that can take advantage of the various tax loopholes across jurisdictions.

 

[Sig]

You can create risk free opportunities if you finance differently from the market.

You can also create true risk free opportunities if you have legal structures that can take advantage of the various tax loopholes across jurisdictions.

This is true. My favorite is universities lending tax-exempt bonds, which allows them to lend at a rate below the risk-free rate. At the same time, the same university is invested in short-term risk-free investments as part of their multi-billion dollar (in some cases) endowments. Of course they're very careful to keep separate pots of money on the accounting side, but since money is fully fungible at the end of the day the university as a whole is making a risk-free spread between the rate they lend and the rate they get, unlike a bank which has to take a risk to get a return higher than their lending rate.

 

[JackRab]

Unless you're saying that you receive an interest rate just for being long cash in a brokerage account (or T-Bills - 1%) and this play is to beat that..

Exactly that...

Don't get me started on the risk in an unregulated digital crypto coin... and it's derivatives...

 

[JackRab]

You can create risk free opportunities if you finance differently from the market.

You can also create true risk free opportunities if you have legal structures that can take advantage of the various tax loopholes across jurisdictions.

Tax loopholes can definitely be low on risk... but I wouldn't call them risk free.

In Germany there was a massive dividend tax loophole that was taken advantage off, if you knew how to... but some firms ran into trouble costing millions. Because it's usually very close to yes/no/crossing lines, you might end up at the wrong side.

But if you've done your homework, then yes... can be very profitable. Usually not for retail though

In Belgium, there used to be a system where profit and losses on options were non-taxable but on stocks were. So there was a strategy where at expiry you could do an ITM hedged short options trade... Options are assigned, the gain in premium is un-taxed... and the loss in being called on stocks at a lower price than bought in the hedge is tax-deductible. I think that doesn't happen anymore... It think it's a bit tricky as well in accounting matters...

@Sig, didn't know about the Uni-bonds... but it's not like we as retail can use that as a strategy though.

 

[misterkel]

Exactly that...

Don't get me started on the risk in an unregulated digital crypto coin... and it's derivatives...

Umm - sure. That's not an answer, just a vague, risky thing that must be true. Because ... regulated exchanges are SO upstanding. (cough cough, Enron, Madoff, boiler rooms, pump and dumps, accounting scandals, 2003 mutual fund fraud, GS selling distressed bonds to its own clients, Barclay's rigging of the gold market, and on...). You can stick with the wolves of Wall Street, but if you think that's somehow safer than a decentralized economy - you're delusional.
Sure, you better do your due diligence, but the failure of one exchange (Worldcom, Lehman) does not implicate strong companies (AMZN, GOOG).

Only in crypto does that logic get traction. Not sure why.

Oh - it's unregulated. Like a hedge fund. Or a private investment. Therefore it's all bad. Because the regulators are there for the little guys. Right?

But go ahead - what exactly is the risk? And how is it different from the same risks in so-called regulated exchanges?

 

[misterkel]

Shit - forgot LIBOR, the trillion $ scandal where the big, VERY REGULATED banks rammed it up the arse of thousands of small municipalities based on the rubric of interest swaps 'to eliminate risk.' Many went bankrupt. Ah, but it's okay - that was 'regulated.' Makes everything just fine.