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cost of carry model should reflect only those dividends to be paid from the time of entry into the futures contract to the settlement date. This can of course be highly subjective, given different forecasts as to amount and timing. The fair value of an index futures contract is therefore the point at which there would be no advantage in either buying the underlying basket of stocks in the cash market, replicating the index, or simply buying the corresponding index futures contract. Before we move on to the practical issues of futures trading, I would like to consider the question: Why trade futures? Surely it is easier to spread bet and I get to keep all my profit! There are many reasons why attempting to trade the future markets through a spread betting firm puts you at a disadvantage; but rather than develop that argument here it will suffice to point out why you can not use a spread betting firm to trade in the style that this book proposes. As a direct access trader we are looking to repeatedly take small profits out of the market and in order to make this a viable plan we need two things: low transaction costs and immediate fills. Imagine you have developed a strategy that takes an average of 2 points (each point is worth 10) out of the FTSE futures every trade and it trades an average of 20 times a day. If you trade this approach with a futures broker, paying 8 a round turn you will clear 240 a day. If you trade this approach through a spread-betting firm with a 4-point spread, you will lose 400. If you are paying a 4-point spread every time you trade, you have to have a strategy that averages more than that. In fact for it to be more worthwhile trading with a spread-betting firm over a futures broker, assuming the above costs, you would need a strategy that averages a profit of about 10 points or more. This also 15 |
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