slk23 wrote:Interesting idea to short the smaller contracts. However, aren't some of them fairly low volume with large bid/ask spreads? I've read that's the case for the smaller gold contracts, for example. I think I'd feel more comfortable staying with the very liquid full size contracts, filling in where needed with the VTI, GLD, and TLT ETFs.
I've been playing with a paper trading account at IB. Using ES, GS, and UB futures contracts with VTI, GLD, and TLT ETFs for balancing does work quite well but since the futures contracts are large it requires a fair amount of capital to guard against a draw down inducing a margin call.
Sam Brazil wrote:
For Gold, each e-micro MGC contract is like $13k, about 1/10th of GC normal gold futures contracts. So that makes for very granular control of gold.
For Stocks, if you went long ES ($104k/contract today) and short NQ ($89k/contract today), that leaves you net about 14k increments for you to play with. You could do it with the Dow or Russell instead for different combinations.
For long bonds, UB is about $192k/contract today and you could short ZB which is $172k/contract today, netting out to 20k increments to play with.
If you've got portfolio margin, I'm assuming that hedging in this fashion wouldn't reduce your buying power by much. Or even if you didn't you'd wind up with something like 10x leverage instead of 20x, but I'm too lazy to do the math.
No doubt regular contracts are better, but that requires a very large account. One could do the math on spreads vs. annual fees and see what would be better.
I have an active trading system though that I'm definitely going to look at for the hedge method mentioned.
slk23 wrote:How would one rebalance with futures? Is it possible to trade fractions of a contract? I assume not, which means trades are in approx. $100K blocks.
For Gold, each e-micro MGC contract is like $13k, about 1/10th of GC normal gold futures contracts. So that makes for very granular control of gold.
For Stocks, if you went long ES ($104k/contract today) and short NQ ($89k/contract today), that leaves you net about 14k increments for you to play with. You could do it with the Dow or Russell instead for different combinations.
For long bonds, UB is about $192k/contract today and you could short ZB which is $172k/contract today, netting out to 20k increments to play with.
If you've got portfolio margin, I'm assuming that hedging in this fashion wouldn't reduce your buying power by much. Or even if you didn't you'd wind up with something like 10x leverage instead of 20x, but I'm too lazy to do the math.
Sam...freaking awesome idea. I always am amazed at the thoughts others have that simply never occur to me. Obviously not a perfect match but definitely worth spending some time studying. Off the cuff, the Dow and the SPX minis might be a closer hedge and the spread is roughly 14k as well.
Thanks, I'm curious how viable it is in reality because it's just a theoretical idea I've been kicking around for a while. Speaking of not being a perfect match, I wonder if a similar idea could be used to lower PP taxes, especially on leveraged version that require more frequent rebalancing...e.g., when it's time to sell a PP asset before 1 year, if you're using leveraged ETFs, if you implement a futures hedge that's an imperfect hedge, hold until the 1 year mark, and then sell the PP asset, you can ensure long term capital gain tax rate instead of short term. But I'm sure there are all sorts of tax laws that make that a very complex issue.
slk23 wrote:Interesting idea to short the smaller contracts. However, aren't some of them fairly low volume with large bid/ask spreads? I've read that's the case for the smaller gold contracts, for example. I think I'd feel more comfortable staying with the very liquid full size contracts, filling in where needed with the VTI, GLD, and TLT ETFs.
I've been playing with a paper trading account at IB. Using ES, GS, and UB futures contracts with VTI, GLD, and TLT ETFs for balancing does work quite well but since the futures contracts are large it requires a fair amount of capital to guard against a draw down inducing a margin call.
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I suppose one could be long the full size contracts and short the high liquid ETFs in order to reduce overall portfolio size. That would avoid the less liquid gold mini/micro contract.
Sam Brazil wrote:
For Gold, each e-micro MGC contract is like $13k, about 1/10th of GC normal gold futures contracts. So that makes for very granular control of gold.
For Stocks, if you went long ES ($104k/contract today) and short NQ ($89k/contract today), that leaves you net about 14k increments for you to play with. You could do it with the Dow or Russell instead for different combinations.
For long bonds, UB is about $192k/contract today and you could short ZB which is $172k/contract today, netting out to 20k increments to play with.
If you've got portfolio margin, I'm assuming that hedging in this fashion wouldn't reduce your buying power by much. Or even if you didn't you'd wind up with something like 10x leverage instead of 20x, but I'm too lazy to do the math.
Yes, MGC is less liquid compared to GC, but I don't really think it's material because you're not day trading. You're holding for weeks or months. At that time scale, any spreads you pay can be thought of as the cost of leverage, which is still really cheap leverage. It's like sub 1% spread, so it's relatively high vs. ES, but it's still pretty negligible in terms of margin cost for such a huge amount of leverage.
