EFPs - 40% Risk Free Return ???

[nmelwani]

EFP - Exchange for Physical (from OneChicago.com)

what are the Risks of the selling a EFP (i.e. Buy Shares, Sell SSF) ?

Trade breakup - Long 100 Shares, Short 1 Single Stock Future.

using the NO.DIV-Risk SSF from ONE - seems like the dividend risk is also out of the equation.

Example: Buy Stock XYZ @ ASK $30.00
Sell SSF XYZ @ BID $30.05 [expiry 1-month]
NET $0.05 for 30days..

Margin requirement is 5% of Long stock value: $30.00 * 100 * 5% = $150
Profit from Trade = $5

Net return 5/150=3.33% per month (or 40% per year) - RISK FREE..

What am I missing out ?

 

[marbig]

What happens in the same example (but when you lose on the Trade) ?:

Example: Buy Stock XYZ @ ASK $30.00
Sell SSF XYZ @ BID $30.05 [expiry 1-month]
NET $0.05 for 30days..

Margin requirement is 5% of Long stock value: $30.00 * 100 * 5% = $150
Loss from Trade = -$5

Net return -5/150= -3.33% per month (or -40% per year)

 

[brettus]

What happens in the same example (but when you lose on the Trade) ?:

Example: Buy Stock XYZ @ ASK $30.00
Sell SSF XYZ @ BID $30.05 [expiry 1-month]
NET $0.05 for 30days..

Margin requirement is 5% of Long stock value: $30.00 * 100 * 5% = $150
Loss from Trade = -$5

Net return -5/150= -3.33% per month (or -40% per year)

What you on about? he's locking in the price between the stock and the EFP. I'm sure there's a problem somewhere though.

Whats the costs associated with buying the stock and holding it?

 

[nmelwani]

What you on about? he's locking in the price between the stock and the EFP. I'm sure there's a problem somewhere though.

Whats the costs associated with buying the stock and holding it?

Commission is $0.50 per lot on IB (that is $0.50 to buy 100 shares and sell 1 ssf)..

No Funding costs (as you are long $15,000 and short $15,000 nominal values). Net change is funds is the $0.05 (* 100) positive into your account.


No equity / market risk. No Dividend risk. No funding risks. yet the return is so high !!

can seem to find the catch?

 

[anley]

Chances are they'll get you on a wide bid-offer spread.

There will be a catch though, nobody lets others make a risk-free 1%-2% a month in the markets especially with exchange traded products.

 

[DionysusToast]

What happens in the same example (but when you lose on the Trade) ?:

Example: Buy Stock XYZ @ ASK $30.00
Sell SSF XYZ @ BID $30.05 [expiry 1-month]
NET $0.05 for 30days..

Margin requirement is 5% of Long stock value: $30.00 * 100 * 5% = $150
Loss from Trade = -$5

Net return -5/150= -3.33% per month (or -40% per year)

As long as you have the margin in the account, no problem...

Still - returns would be calculated on risk capital, not account size to be 40%.

 

[DionysusToast]

what about liquidity issues on the SSF - do they have MMs taking the other side?

Last time I looked, it seemed like no-one was playing SSFs.

 

[DionysusToast]

"Example: Buy Stock XYZ @ ASK $30.00
Sell SSF XYZ @ BID $30.05 [expiry 1-month] "

In this case, you ask price is below the bid price - is this a regular occurence across the stock/SSF?

Sounds like something an arb program would pick up on quickly....

Or is this this interest component reflected in the price of the SSF?

Confused...

 

[nmelwani]

Chances are they'll get you on a wide bid-offer spread.

There will be a catch though, nobody lets others make a risk-free 1%-2% a month in the markets especially with exchange traded products.

the 0.05 was taking into account the spreads (Bid-ask)... On IB you can set a combo order EFP (buy share, sell ssf) and the trade showed net credit of $4.5 (0.50 for commission).

put the trade on for 1 lot to test.

was wondering if there were any actual risks???

Liquidity is not the issue if you go with big names. Spreads are also covered if you do the trade via combo. what could be the other risks in play?

 

[nmelwani]

As long as you have the margin in the account, no problem...

Still - returns would be calculated on risk capital, not account size to be 40%.

since there is no capital at risk, only 5% of the nominal amount used as margin - ROI was calculated as return on money locked up (i.e. the 5% margin amount).

what I'm trying to get from my fellow traders is: is there any risk ?

 

[nmelwani]

"Example: Buy Stock XYZ @ ASK $30.00
Sell SSF XYZ @ BID $30.05 [expiry 1-month] "

In this case, you ask price is below the bid price - is this a regular occurence across the stock/SSF?

Sounds like something an arb program would pick up on quickly....

Or is this this interest component reflected in the price of the SSF?

Confused...

me too.. normally the SSF prices in interest and hence trades for a slight premium. but with IBs margin requirements and leverage - seems like 2-3% per month. too high for a risk free trade.. whats the catch ???

 

[anley]

Try it then, see what happens. If it doesn't work your the trade is maybe breakeven at best. Anyway, maybe it can be done on small amounts, just not large trades.

 

[klenko]

You must buy the stock. Even if you have margin 5% because of the hedge (=short SSF), you will be charged interest (think it is about 1.8% p.a. now) on 95% of long stock value.

 

[Cornix]

As far as I know (may be wrong, cause didn't check it for a while), it doesn't matter if your stock is hedged with future, options spread or whatever, overnight margin on a stock cannot exceed 1:2, unless you switched to portfolio margin (for accounts over $100K).

So it's not that easily leveraged strategy for small accounts.