I mentioned to DrBob in the last thread:If you want to make some good money in the next few years with low risk by doing something fancy, do I have a trade for you!Dividends on European blue chips in the Euro Stoxx 50 index haven't been below about €115 per year for ages.For a crude rule of thumb, they have been running at around "€100 plus two digits of the year".€125.70 in 2018€122.00 in 2019.There was understandably a dip during the credit crunch. The worst two years were €115.71 in 2009€112.80 in 2010So....How much would you be willing to wager that they'll be above €70 at or before (say) 2025?The market is very bearish, and that's the level built into the current futures contracts on these dividends.That makes absolutely no sense at all.It might not work out, but in terms of most likely outcome the market price does not correspond to anybody's consensus forecast.Compared to most things, it's darned near free money sitting there waiting to be grabbed.Very low margin requirement, and the prices usually move pretty gradually.Slap down €1875 in margin security. If the contract rises from 70 to settle at 115, you make maybe €4500 profit per contract spread over the next few years.But you have to have the cash to cover any interim mark-to-market profit and loss.If optimism returns sooner, you'll likely make the great majority of the target profit in much less than five years.Some information to consider:These futures contracts go out to 2029 at the moment, expiring the December of your choice.As I type, the bid/ask for the 2024 contract is 70.1/71.1Other than short term, the values for future years tend to be extremely similar.So, it's generally very easy to roll your contracts further into the future with almost no cost, provided you do it while there is still time left, say a couple of years.Inflation works to your advantage as a tail wind. The contracts are in nominal euros.You don't really have to worry about the constituents of the index going broke.If they do, they get replaced.You are wagering that the future set of index members, whatever they may be in the future year of your choice, will pay out a good aggregate dividend.Ticker at Interactive Brokers is DESX5.Same sort of futures exist for the FTS100 index in the UK.For long complicated boring reasons, this works best in Europe.Jim
Not something I can do on say E*Trade, I assume.John
Not something I can do on say E*Trade, I assume.Nope. You need access to European futures.E*Trade allows only a very small number of different futures contracts.All but two are sundry US equity index futures.I have no idea if there are laws preventing US persons from trading them.Jim
Jim would every 3 month dollar cost average and buy 2024"s you mentioned, or just roll out further each year as you suggested?------------------------------------------------------------------------------------------------------You don't really have to worry about the constituents of the index going broke.If they do, they get replaced.You are wagering that the future set of index members, whatever they may be in the future year of your choice, will pay out a good aggregate dividend.Ticker at Interactive Brokers is DESX5.Same sort of futures exist for the FTS100 index in the UK.For long complicated boring reasons, this works best in Europe.Jim
Jim would every 3 month dollar cost average and buy 2024"s you mentioned, or just roll out further each year as you suggested?I would probably buy one of each year I feel confident about, erring towards later years.The main observation is that, bizarrely, the difference by expiration is stupidly small.So* it costs you nothing more to go for longer* ...but if the economy looks good sooner, it's very likely that your contract will rise with earlier ones and you'll just make your money sooner.The bid/ask spreads are reasonable for all dates, too.A sane market would show a big drop for the next year and a big rebound up to near the usual level after a couple of years, and a full rebound after a bit more.But this market seems forever broken--the difference by date is irrational.Ask prices for various contracts right now:2020 €53.0 (low because dividends are being cut now...seems plausible)2021 €49.9 (low because next year will probably be terrible...seems plausible)2022 €64.0 (a bit of recovery expected, but still showing a whole lot of pessimism...maybe too much, maybe not)2023 €67.2 (really should be assuming a return to normal above €100 by now...or at least well on the way)2024 €68.4 (really should be assuming a return to normal above €100 by now, more likely €110+)2025 €69.1 (doesn't make any sense)2026 €68.9 (doesn't make any sense)2027 €68.3 (doesn't make any sense)2028 €68.2 (doesn't make any sense)2029 €67.9 (doesn't make any sense)Since before/during/after the credit crunch, I believe no year has settled below about €109.80(I'm missing 2012).So forecasts under €70 are very extreme indeed.In effect they imply a huge crash worse than the credit crunch (not all that unlikely), but with not a single hint of recovery for a decade.Jim
I have an account at InteractiveBrokers. Can USA citizens trade it there, and if not where?
I did a trial order--its working now. Thanks
I have an account at InteractiveBrokers. Can USA citizens trade it there, and if not where? I honestly don't know if it's allowed for Americans.I suspect it's OK, since it's not an equity index. I think those were forbidden for a long time.And if it is allowed, IB is where you could most likely do it.Request the trade permissions and you'll know within a day.I believe you need to add "German futures", and (if you're interested) maybe German futures options.I'm not sure what packages you may need to add for the market data feed.For me, I see bid/ask for the futures but not the futures options.Maybe there is no bid or ask on the FOPs, or maybe I don't have the right feed.Maybe the "market data assistant" tool can tell you that.The exchange is DTB for both.Jim
For long complicated boring reasons, this works best in Europe...For anyone interested, you can see the same thing for the S&P 500 here.https://www.cmegroup.com/trading/equity-index/us-index/sp-50...Dividends were recently running at about $61 per year.The futures market implied forecast is2020 $40.60 (lots of dividend cuts, makes sense)2021 $35.95 (even more dividend cuts, makes some sense sense)2022 $37.15 (even worse?)2023 $40.60 (OK, some recovery starting, but still down 1/3...seems a bit conservative)2024 $45.00 (recovery continuing but still down 1/4?)2025 $47.80 (forecast is a very long slow grinding recovery...)2026 $52.85 (getting closer...)2027 $57.00 (closer...)2028 $60.55 (basically back to 2019 levels, except for inflation)2029 $63.65 (a new record!)2030 $64.95 (rising!)This seems unduly pessimistic to me, especially around 2024-2027, but not impossible.It's not nearly as extreme as the European figures which represent dividends still being down about 40% after a decade.Jim
I think Europe is a better investment than USA in this for another reason.Germany and others handling virus better than USA.Jim, your opinion on this?
I think Europe is a better investment than USA in this for another reason.Germany and others handling virus better than USA.Jim, your opinion on this?Hmmm...though probably true, I don't see it as the biggest factor in this investment discussion.The economic pain will be worldwide, unevenly spread.But it will also end, worldwide, at some point.So, after the recovery stretch, I think what matters most is which market had the most incorrect initial estimate of the pace of recovery, not which market has the biggest or fastest recovery.Offhand I think the US market is probably the more resilient, but I think the European market has the most incorrect estimate of the recovery pace and potential.Things might well be bad, but not THAT bad.Jim
I think Europe is a better investment than USA in this for another reason.Germany and others handling virus better than USA.The virus is not the economy.Between the unknowns and differences in how deaths are attributed to a cause and the possibility that the governments and institutions are either lying or simply wrong, I don't think we actually know that "Germany and others [are] handling virus better than USA". The virus has not worked its way through the US, because it is just just geographically larger that the European countries. Those countries are closer to reaching stable state than the US.But at any rate, "this too will end". One way or another, in the near future the virus thing will be resolved. All the countries will have reached a stable state (hopefully without piles of corpses rotting in the streets). At that point, the economies will start to get going again, and the strongest and most resilient economy(s) will pull ahead. We'll be getting back to the base rate---probably. And the base rate is that the US economy will pull ahead of Germany and others.
This seems unduly pessimistic to me, especially around 2024-2027, but not impossible.Or ... current spot prices don't yet reflect the impact expected by the futures market. It's interesting data at the very least.
This seems unduly pessimistic to me, especially around 2024-2027, but not impossible....Or ... current spot prices don't yet reflect the impact expected by the futures market. It's interesting data at the very least. Certainly. Sometimes the market has it right.Even if those US figures seem quite pessimistic, they aren't so pessimistic that I feel like wagering hard earned cash on something much better happening.The same is not true of the European forecast. I just don't believe the implied outcome.(and there is a plausible explanation for why they are so implausible--a one sided market)Even if I expect the recovery to be very much longer and slower than in the US, it still does not seem plausible to me that the total dividend payout of the 50 biggest European firms will be 40% lower in 2029 in nominal termsthan it was in the credit crunch, after 20 years of recovery, normal economic growth, inflation, and industry concentration.The first time I spotted this opportunity was in 2012.https://boards.fool.com/an-esoteric-derivatives-bet-30095763...The futures market then expected dividends of under €75 for all of 2018-2020, which seemed implausibly lowThe final 2018 figure was €125.70The final 2019 figure was €122.00Note, you probably want to close these well before they become bottom-up estimates based on real specific companies with real business conditions and forecasts.As long as it's a year or two out, the price is based on mean reversion and top down macroeconomic forecasts.Or, it should be.In reality it mainly it seems to be based on the exact continuation of current conditions, whatever they may be.So really, the main advice is to close them some year, any year, that the business conditions are OK.But long enough before expiry that the expiry year isn't going to become "not OK".At the moment, the *ask* prices for 2022-2025 are 64.40 / 68.20 / 68.90 / 69.80Jim
Ask prices for various contracts right now:2020 €53.0 (low because dividends are being cut now...seems plausible)2021 €49.9 (low because next year will probably be terrible...seems plausible)2022 €64.0 (a bit of recovery expected, but still showing a whole lot of pessimism...maybe too much, maybe not)2023 €67.2 (really should be assuming a return to normal above €100 by now...or at least well on the way)2024 €68.4 (really should be assuming a return to normal above €100 by now, more likely €110+)2025 €69.1 (doesn't make any sense)2026 €68.9 (doesn't make any sense)2027 €68.3 (doesn't make any sense)2028 €68.2 (doesn't make any sense)2029 €67.9 (doesn't make any sense)Jim, If I want to be conservative which years should I buy?
Jim, If I want to be conservative which years should I buy?In my experience with futures one picks the contract and posts a margin to hold it. What kind of margin is Interactive Brokers requiring for DESX5?
Filled up the car with gas at Walmart today. $1.21/gallon.Just yesterday I told the wife about a funny tweet I read,,the guy said that he drove past a gas station with $1.50 gas. But his astonishment was NO LINE OF CARS.Ditto here this morning. $1.21 and no madhouse of cars. We drove right up to an empty pump, no waiting.
Jim, If I want to be conservative which years should I buy?Longest. There is no extra cost, and you can close it any time between now an expiry that the profit looks good to you.Surely the market will be more optimistic than this some time in the next decade.Jim
In my experience with futures one picks the contract and posts a margin to hold it. What kind of margin is Interactive Brokers requiring for DESX5? At the moment, €1955 to open the position, €1955 the first night, €1564 thereafter.It can change.It was under €1000 the first time I looked at it years ago, so I presume current levels are "surge pricing".Remember, this isn't a sunk cost, it's just a margin requirement.The better question is, what's the downside?As with any futures contract, you have to cough up any mark-to-market loss prior to closing the position, even if it's transient.(plus maintaining enough in your account to meet the margin figure above)If for some reason the market consensus some day is that your chosen year will have zero dividends,being the worst case, and you are long at €69, you have to have €6900 per contract to hand your broker for as long as that consensus lasts.(in addition to your ongoing margin requirement of €1564)It's a lot like being long index futures. If the index goes to zero, you have to cough up the index entry level times the futures contract multiplier.Normally that doesn't happen, it's only a theoretical risk. Nobody expects the index to go to zero.But it's good to watch the worst case.The most likely situation is that you won't have to cough up nearly that much since today's figures are very pessimistic.It might go down another €10, €20 even, but probably not more than that at a guess.But it's good to know the worst case. Theoretically you *might* have to cough up €6900 per contract in cash at any time.On the up side, if the final settle price rises to €110+ as I expect, you end up with a profit of €4100+ per contract.To me, the odds seem quite high that you'll make >€2 in profit for every €1 in cash you have to cough up at any intermediate time.But again, do keep in mind the worst case.Remember also that prices for all years tend to be strongly correlated, so you probably don't have to (nor want to) wait for the final expiry.To my eyes, it's extraordinarily likely that the price for all later years will rise largely in tandem as the economic outlook improves over the next (say) 1-2-3 years.So, even if you're long the 2029, you can probably make most of your profit long before then.If I'm happy with the long run prospects of any deal, I'm always happier with making 80% of the profit in less than half the time.Jim
The better question is, what's the downside?Just to add another alternative again:If the notion of having to cough up cash for mark-to-market losses in the mean time, you can also buy options on them.The upside isn't as good because the breakeven is worse, but there is never any need to cough up more cash than you do on day 1.I think €70 calls cost about €19-20 (check this) so you don't break even and start making money till the consensus gets above €89-90.But you can "set it and forget it", and can never be asked for more money or margin, which is a nice advantage.In fact, you probably don't even need a margin or futures account.Jim
Longest.There is no extra cost, and you can close it any time between now an expiry that the profit looks good to you.Surely the market will be more optimistic than this some time in the next decade.JimLongest 2029 has much larger spread between bid and asked.
Longest 2029 has much larger spread between bid and asked. Yes, but still not too bad when I checked.In fact, for something so esoteric I was surprised how tight they were.e.g., only 50-70 eurocents for all the 2021-2025.All expiries traded today, some quite a lot, which is also more liquid than I expected.There's a good chance you might get within the bid/ask with a limit order.Besides, it's only the ask that matters if you're a buyer : )All the asking prices looked pretty good to me.€67.90 for 2029? Sign me up. I don't care if the bid was €30.By the time you want to close, it will be closer to expiry and likely more liquid.So a fair price for closing the position seems likely.Jim
...Ticker at Interactive Brokers is DESX5.Sounds like Big Daddy's Hot Tip
Has anyone seen DIVY? It is an ETF that tracks dividend swapshttps://www.realityshares.com/app/DIVYwww.etf.com/DIVYMaybe a similar idea?
DIVY...Maybe a similar idea? Yes, seems so.But they make the wager on the near years, not the far years.Their portfolio seems to be spread over the near term. I couldn't find anything past 2023, and it seems to be 2/3 2020 and 2021.This probably explains why it crashed recently.It's currently spot on half its value a little while ago.So, buying this is a very similar strategy, but it's a wager that things will improve sooner.My thinking is based on long run macroeconomic trends, recoveries, and mean reversion.Theirs is more "what happens next year", which depends more on a specific year rather than a typical year.It's also different jurisdictions.They say it's US, Europe, and Japan.The portfolio looks to be nearly all S&P 500 to me, but perhaps I'm misreading it.Jim
Jim,Thanks a lot for your always valuable comments.I am trying a DESX5 202912 Futures and the amount to charge at 68 price is €6800 right now at IB. Initial margin €3881 and maintenance margin 3496.This is very different from the €1875 you mentioned at thread 277088. Has IB increased their margin requirements?If it takes me €6800 today in order to get 12000 in 2025, the ROI is 10.55%.I think I am missing something and any comment is greatly appreciated.Thanks again,jcbg
If it takes me €6800 today in order to get 12000 in 2025, the ROI is 10.55%.Remember that that is only your margin commitment, not a purchase cost.If you already have a cash balance in your account, that will do double duty. The cash is still in your account.And, if there were such a thing as interest on T-bills, you could have it in T-bills and still earn the interest.Even if you only have long stock position, they will create margin from that, for a small interest fee.You don't have to sell the stock to open the futures position.Your more serious cost is any mark-to-market loss, whatever that may be, however long it lasts, and however you choose to assign a cost to that as time or opportunity cost.This of course is unknowable, but you could pencil something in.Maybe the price will drop to €59 for a while, then €49, then rise again.You'll have to cough up €1000 per contract, then €2000, for a while.Estimate how much of the time that might be, and how much, and what the notional cost is to you for being ready to supply that.Maybe you figure that having to tie up that money is worth an opportunity "cost" of 8%/year to you, or whatever you choose.You also have to bear in mind the theoretical maximum loss.Of the contract trades down to €1 for a while, you have a mark-to-market loss of €6800 for that period, so you have to have the ability to find €6800 on short notice.The futures call options are not nearly as attractive, but they don't have that disadvantage.As for the ROI, it's very likely that you can close a position at a good profit long before expiry.So, for any given target level, your annualized return to expiry might be considered a worst case.The first time I suggested this in mid 2012, the 2016 contract rose from €80 to €93 within six months.https://boards.fool.com/esoteric-derivatives-30411479.aspxThat represented a very good ROI no matter how you place a vale on your margin commitment.Initial margin €3881 and maintenance margin 3496.This is very different from the €1875 you mentioned at thread 277088. Has IB increased their margin requirements?Yes, they can and do change.Once upon a time it was €880 per contract for the maintenance margin.Margin requirements frequently go up when markets are in chaos, and fall back again after.But your figures over 3000 surprise me...my IB info page (right click on ticker - contract details) says it's €1840 initial margin and €1472 maintenance margin thereafter.Intraday and overnight margin requirements are shown as being the same.Where did you get your figures?Jim
Jim,Thanks for your kind explanations.I was misunderstanding margin with real cost. I keep some cash and long stock positions so real investing amount is not the margin.I've checked again and at this moment, margins are even higher for me!See an image here https://imgur.com/a/p3A9Co8 just got directly from my account at IB. They are €4407 and €4022!Your contributions are a luxury!Thanks againjcbg
I've checked again and at this moment, margins are even higher for me!Ah, I didn't realize they varied by client...I thought they were set by the exchange, but perhaps that's just a floor.I guess it's not that surprising.Could be based on portfolio size, cash balance, margin type (Reg T or Portfolio), could be country.Maybe I get frequent flyer points...my option commissions are frequently negative.My account is run out of IB UK. I keep some cash and long stock positions so real investing amount is not the margin.The real cost is the "nuisance" of having available, at all times, all the cash they could conceivably ask for.By "available" I mean having a way to lay your hands on it on very short notice.Nobody thinks the market price of the contract will drop to zero. But nobody expects the Spanish Inquisition, either.It's a lot like being long index futures.If you go long at 2300 and it goes to 2500 or 2100, you know what you gain or lose.But the futures price *could* be zero all day tomorrow. Who really knows for sure?Jim
I think Europe is a better investment than USA in this for another reason. Germany and others handling virus better than USA.And if there is a worldwide recession/depression, who are you going to sell to?DB2
Filled up the car with gas at Walmart today. $1.21/gallon.We're at $1.09 currently.DB2
We're at $1.09 currently.I bet in California gas has dropped all the way down to $3.99.
San Diego today - $3.35.
We're at $1.09 currently.I bet in California gas has dropped all the way down to $3.99.$2.39 at our Costco. But I had to look it up because I haven't bought gas in almost two years.Elan
2025 €69.1 (doesn't make any sense)Quick follow up: that contract is now at €82.2.Equates to €1300 profit per contract in 9 days.I would not be hugely surprised to see fresh good entry points some time soon.2028 is still at bid €76.0/ask €76.7 which seems implausibly harsh.It was never below 109 right through the credit crunch and its aftermath, but by 2028 there will have been 20 years of economic growth and inflation.Jim
Trying to visualize how this instrument actually works, who is on the other side of the trade, what drives the price. Pre-crisis, it looks as if the 2025 contract was trading ~100, while the 2028 traded ~90. While longer contracts seem like greater optionality, why would longer mean cheaper here during normal times? It appears the optionality premium falls to the seller, not the buyer, which seems counter to the general idea that growth and inflation favor a higher bias for the expected ending value. Perhaps another way to see this price behavior is to assume that downside risk is greater than upside potential.It's usually helpful for me to visualize futures trades as having two sides: Speculation and hedging. I'm not sure I understand exactly what the hedge trade is in this case. Own the index, sell DESX5 futures? Seems as if the more pure form of that would be to sell a contract on the index itself vs. index dividends. Just trying to imagine what a hedge seller might look like at these low levels, where the index is down ~24% and I guess the DESX5 2027 is down about the same.I guess owning DESX5 is the same risk as owning the index, but without receiving the actual dividends. Therefore longer = more risk = lower price. Fascinatingly confusing, as esoteric trades usually are.
Trying to visualize how this instrument actually works, who is on the other side of the trade, what drives the price. Pre-crisis, it looks as if the 2025 contract was trading ~100, while the 2028 traded ~90. While longer contracts seem like greater optionality, why would longer mean cheaper here during normal times? It appears the optionality premium falls to the seller, not the buyer, which seems counter to the general idea that growth and inflation favor a higher bias for the expected ending value. Perhaps another way to see this price behavior is to assume that downside risk is greater than upside potential.It's usually helpful for me to visualize futures trades as having two sides: Speculation and hedging. I'm not sure I understand exactly what the hedge trade is in this case. Own the index, sell DESX5 futures? Seems as if the more pure form of that would be to sell a contract on the index itself vs. index dividends. Just trying to imagine what a hedge seller might look like at these low levels, where the index is down ~24% and I guess the DESX5 2027 is down about the same.I guess owning DESX5 is the same risk as owning the index, but without receiving the actual dividends. Therefore longer = more risk = lower price. Fascinatingly confusing, as esoteric trades usually are. It's apparently not as subtle as all that. Or so I hear.The general explanation that most people favour:Simply put, there are some players, particularly in Europe, that need to sell these things to hedge certain risks.It's a small but very necessary part of their business, so they aren't very price sensitive.There is no natural investing constituency for buyers of these...who makes long slow boring macro bets on dividends rising over time? It won't get you a December bonus.Thus the few willing buyers get very good deals.Here is a longer explanation, which I have read, but I don't know if all the details are precise.And maybe there are holes in my understanding, and my explanation.The general explanation above probably still holds, but maybe t his makes a clearer narrative.Structured investment products are very popular in Europe.Few people have stock accounts, so they get sold complicated things that might not be the best idea for them.Investment houses and insurance companies are very big on selling products that track index levels,sometimes with caps and floors and options and sundry triggers built in.Lots of unsavoury shell game to make it seem to the rubes that the risk has magically disappeared, but that's another topic.These products typically track index values, not total returns. Partly because of the triggers and options, partly tradition and ease of selling.So, if they have guaranteed someone returns that track the Eurostoxx 50 index, it's easy to hedge the index risk, as there are futures contracts for that.But if they hedge their €100m exposure by actually buying the €100m worth of stocks, there is a mismatch.The total return they get from €100m of stocks won't track the €100m worth of index, because the dividend return is unknown.In reality they might (and probably do) use an entirely synthetic portfolio, but end up with the same problem.To complicate things further, these tend to be very long dated products. This multiplies the risk from any mismatch.Thus, to get decent hedging, which their bosses and regulators require them to do, they need to *sell* long dated dividend futures.So, instead of hedging their €100m index exposure by buying the €100m worth of stocks, they buy (say) €102m worth of stocks and sell €100m worth of stock futures and €2m worth of dividend futures.(not a real example, just explaining how they sell a lot of one thing and a little of another)Between the index futures and the dividend futures they now have a flawless hedge for the next decade.The errors on the dividend exposure make up a very small piece of this pie, most of which comes from the fees from the retail customers anyway, so it doesn't matter to them that they aren't getting a very good deal on the dividend futures prices.So, it's one of those markets that has a large number of price-insensitive forced sellers, and a chronic shortage of buyers.This means that, in Europe, it tends to be structurally in backwardation.It has persisted for years, even as European dividends have risen at 5%/year in nominal terms in the last 20 years.Whenever there is a market disruption, the structural backwardation gets to seemly implausible extremes in terms of the implications for future dividends.Interestingly, I perceive the call options to be very expensive compared to the futures. Perhaps.I wonder if that is because the futures market is imbalanced and irrational because of the large forced sellers,but they don't play in the options market, so the options prices seem to be relatively sane.The premiums are high on an underlying futures product with (in normal times) almost no volatility.If I weren't so lazy I'd look for put/call asymmetry imbalances in the options market.Jim
Curious that no one mentioned the scenario of the Euro currency going bust. If that plays out what would happen to DESX5?In 2012 many people thought the end of the euro for the cost of bailing out Greece, Portugal, Ireland, Cyprus and to some extent Spain. Now that almost every country is expanding their debts significantly nobody talks about a non-euro Europe.What am I missing?
Curious that no one mentioned the scenario of the Euro currency going bust. If that plays out what would happen to DESX5?It depends on whether it was, or was not, accompanied by some other kind of financial/business crisis.If it's just a very low euro, it doesn't really matter.The contract is entirely in euros. You're wagering that the dividends will be decently high measured in euros, not in purchasing power terms.If the dividends are as as high as expected measured in euros, (which might be small measured in other currencies), it still pays out a profit.Your profits would be a tad smaller when converted back into your home currency, but (importantly) they'd still be the same percentage profits.Your margin requirement and maximum risk also shrink (measured in your home currency) as the euro slides.It might be extra good, as many of the Euro Stoxx 50 are big exporters with big cost bases in euros.Airbus, Volkswagen, Philips, Sanofi...Measured in Euros their profits and dividends would probably rise in the scenario of a euro falling without another crisis going on.You'd make even more profit.Of course, if the falling Euros is accompanied by a broader crisis or recession, then businesses will do badly and dividends will be low...that year, maybe the next.That's one good reason to close the position at least a year or two before expiry, or at least have more than one long-dated expiry.You don't ever want all your wager to be on what's going to happen in the next year.This contract is about long run macroeconomic expectations when it's a long time before expiry, but it's more about a bottom-up view of specific individual companies' current business conditions when near expiry.You want to wager merely that some fairly distant year will be normal for big companies in general, not that specifically next year will be normal for certain specific companies.Jim
Mungofitch, thanks for your reply. From the reply I assume my "going bust" was taken by you as a strong devaluation, which is also a possibility. My point was more along the lines of: "as of Jan 1, 2022 the euro will cease to be a legal tender, please each country go to your local coins. The idea of a common currency was a beautiful idea but with countries with such productivity disparity as Germany and Greece it did not work out, Brussels out" The contracts are in Euro and based in Germany. Probably will be converted to Deutsche Marks (or whatever new currency the Germans pick). I'm sure we can imagine different scenarios but you get the drift. On the other hand those companies in the Index most likely would be still be operational. In any case, it's no clear to me if the contracts would be still be valid.Also, see the attached link that describe the mispricing of the instrument BACK IN 2019. https://medium.com/@byrnehobart/the-great-european-dividend-...
Also, see the attached link that describe the mispricing of the instrument BACK IN 2019.https://medium.com/@byrnehobart/the-great-european-dividend-......Jim, what is your feeling about the hedging mentioned in this article?
Jim, what is your feeling about the hedging mentioned in this article? (corrected link https://medium.com/@byrnehobart/the-great-european-dividend-... )That's a very fancy article.I guess, at a 1000 foot view, I would sum up my view as follows:In normal times, you have to understand the subtleties of the process and what drives it if you want to make a buck.That's what the author is describing. They were normal times when it was written.Implied dividend forecasts seemed wrong, but within the normal range of dumbness like earnings forecasts.As far as I can tell, it's an insightful view.Frankly, he probably understands the pricing dynamics much better than I do.But when things are just plain broken, you don't need subtleties.It's just hard to find any plausible scenario that would result in the dividend levels assumed by current futures pricing.Sure things are going to tank for a year or two, but it isn't plausible that this has much to say about dividend levels 9 years later.It's only at those "broken" times that I am interested in, or mention, this strategy.Mine is a very naive rationale unrelated to hedging, convexity, or yield curves:In the end, I just don't think it's plausible that European blue chip dividends will fall by 40% and then stay there for a decade.Maybe it's silly of me to talk about something whose subtleties I don't fully appreciate.But sometimes the margin of safety is so large that it's not rocket science.Usually when something looks too good to be true, you're the patsy.But sometimes, just occasionally, it's just plain a good wager.It's like the story of the two economists walking down the street. One spots a $100 bill, and starts reaching for it."Don't bother," says the other, "If it were really $100 someone would already have picked it up."Jim
see the attached link that describe the mispricing of the instrument BACK IN 2019.The piece suggests an interesting point in terms of the sweet spot of where to buy. Since the price gap closes as the dividend year approaches, buying a very long dated contract means you will be waiting quite a long time for the price to converge. The author seems to suggest going just a few years out might yield the best return. Yes, you can decide when you want to close your position, but the nature of this contract is that lots of time left on the contract means the gap will still be larger the further out you are when you close it.
Since the price gap closes as the dividend year approaches, buying a very long dated contract means you will be waiting quite a long time for the price to converge....lots of time left on the contract means the gap will still be larger the further out you are when you close it. You would think so.But no, it doesn't seem to work that way. At least in the past, including the recent past.When a crisis hits, all future years seem to be dragged down in parallel.When optimism returns, all future years seem to rise in parallel.When people get more sanguine about (say) 2022-2023, you'll likely see all the prices 2024-2029 rising in tandem as well.So, by going with a long dated contract, you're not relying on things getting better sooner, but still benefit if they do, so it's the smart bet.You have lots of time for normality to return, but if it comes sooner, you make your profit and close sooner.It's not a yield curve, it's more of a flat plateau that moves up and down.As an example, the price on the 2025 is up to about 83 now, up from 69 all of 12 days ago.There is no sane reason to think that economic news in the last couple of weeks about economic environment in the next two years would change the outlook for 2025 by any material amount.So, that article about the "sweet spot" is about playing the fancy stuff back when times were normal.Maybe it's insightful, but times are not normal now.It seems more like shooting fish in a barrel, so you don't need to be an ichthyologist.Jim
Hey Jim:The trade seems to have worked well, wonder if there is any juice left at this point. I see the 2025s trade around ~90. At this point do you think the issues from the Medium article come into play?MG
I think there is a fair bit of money still to be had. I think.After a sell-off as we saw, the usual thing seems to be a rebound at first, followed by a long slow grind upwards.Could be other dips to come, of course.So, you have to assess what ultimate number you expect it to settle at, and what the maximum annualized rate of return from here that represents.As soon as it's no longer an interesting rate for you, or doesn't reflect any residual risk you perceive, close it.Personally I don't think a number under 110 makes sense for 2026.But then again, I haven't put my money where my mouth is on this one.Jim
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