How to arbitrage in stock index futures?

Generally speaking, the greater the volatility, the greater the return. Is there any situation where the volatility is small and the return is large? Yes, that is hedging arbitrage

When we establish two investment targets and their fluctuation directions are opposite, then as a whole, whether the market rises or falls, after the profits and losses are offset, the fluctuations are limited.

Many people understand that hedging is used to control risks, because after hedging, you can lose less or no money even if the market falls.But at the same time, hedging also limits profits because when the market goes up, you don't make money.

Some people will definitely ask, why do hedging? It’s better to buy financial management from a bank.The reason is that after hedging, apart from offsetting the profits and losses caused by market fluctuations, what else can you gain? After the implementation of some hedging strategies, you can obtain a fixed-income product, such as the hedging of short stock index futures orders and spot prices; after the implementation of other hedging strategies, you can obtain cheap short options or long options, such as grade A and Convertible bonds for hedging

The following Arbitrage Master will describe in detail the hedging strategy of stock index futures and discount grade A

Overview of stock index futures
The so-called stock index futures are standardized futures contracts with a certain stock index as the underlying asset. The price quoted by the buyer and seller is the stock index price level after a certain period of time. When the contract expires Later, stock index futures were delivered through cash settlement of the spread.

Compared with stock trading, there are many obvious differences between stock index futures trading:
(1) Stock index futures contracts have expiration dates and cannot be held indefinitelyNormally you can hold stocks after buying them, but stock index futures contracts have a definite expiration date.Therefore, when trading stock index futures, you must pay attention to the contract expiration date to decide whether to close the position in advance or wait for the contract to expire for cash delivery.

(2) Stock index futures adopt margin tradingWhen trading stock index futures, investors do not need to pay the full amount of the contract value, but only need to pay a certain proportion of funds as a performance guarantee. Currently, stock trading in my country requires the payment of the full amount of the stock value.Since stock index futures are margin transactions, the loss may even exceed the investment principal, which is also different from stock trading.

(3) In terms of trading direction, stock index futures trading can be short-sellingStock index futures trading is a two-way transaction. You can buy first and then sell, or you can sell first and then buy. However, the stock market in some countries does not have a short-selling mechanism. Stocks can only be bought first and then sold. Short selling is not allowed. At this time, stock trading is One-way transaction

(4) In terms of settlement method, stock index futures trading adopts a same-day debt-free settlement system.In stock index futures trading, the exchange must settle the trading margin on the same day. If the account margin balance is insufficient, it must be replenished within the specified time, otherwise the position may be forcibly closed.Stock transactions are full-price transactions, which do not require additional funds from investors, and the book profits and losses are not settled after buying the stock and before selling it.

Stock index futures hedging method
The stock spot market and the stock index futures market are closely connectedAccording to the system design of stock index futures, the futures price will be equal to the price of the underlying index in the spot market on the expiration date of the contract.However, in actual market conditions, the futures index price is often affected by a variety of factors and deviates from its reasonable theoretical price. The price gap between the futures index and the spot index often appears to be too large or too small, resulting in a gap between the futures market and the spot market. We call this kind of simultaneous trading across the futures market and the current market "futures and current arbitrage".

When the spot index is undervalued and the futures contract of a certain delivery month is overvalued, investors can sell the futures contract and buy spot at the same time to establish an arbitrage position; when the gap between spot and futures prices tends to Normally, the futures contract is closed and the spot is sold at the same time to obtain arbitrage profits. This strategy is called "forward arbitrage."In forward arbitrage, there are five options for buying spot:

First, buy ETF funds
For example, we want to arbitrage the price difference between the CSI 300 spot and stock index futures, but buying CSI 300 stocks is too troublesome. At this time, we can choose the CSI 300 ETF fund as an alternative to the spotWhen we find that the deviation between the stock index futures and the spot exceeds the expected value, we buy the CSI 300 ETF fund and short the stock index futures position. When the deviation between the two is reasonable, we sell the CSI 300 ETF and close the short position in the stock index futures.If the deviations never converge, then the deviations between the two will inevitably converge until the settlement date.

The second is to buy spot stocks
There are liquidity restrictions in the CSI 300 ETF fund. If a large amount of funds is used for forward futures arbitrage, the brokerage can provide professional trading software and buy 300 CSI 300 constituent stocks at the same time to replace the CSI 300 ETF fund. , the closing strategy is the same as that of ETF funds

The third is to buy closed-end funds
There is a discount in closed-end funds, so using closed-end funds as spot money can simultaneously earn the difference between the discount of closed-end funds and the current spot price.Since there are no closed-end funds that completely track the CSI 300 Index, this type of futures arbitrage cannot achieve complete hedging of positions. There may be deviations between the CSI 300 Index and the closed-end funds.Therefore, in this type of arbitrage, the profit is not fixed, and there is even the possibility of loss.

The fourth is to buy graded funds
If there is an overall discount or overall premium in the tiered funds, you can use the tiered funds as spot goods, while doing discount arbitrage or premium arbitrage, while using stock index futures short orders to protect

For hedging of stock index futures, the key is the premium and discount of the corresponding point of the futures.

Stock index futures premium structure

As shown in Table 8-1, the price of IF stock index futures contract is higher than the price of CSI 300 spot, which is called "futures index premium"

If the price of IF stock index futures contract is lower than the spot price of CSI 300, it is called "futures index discount", as shown in Table 8-2

Stock index futures discount structure

The reasonable state of stock index futures should be premium (excluding dividends), because investors can save money and interest by using CSI 300 futures to replace the CSI 300 spot. , so people who invest in futures are willing to pay a certain premium to buyIn addition, stocks always rise in the long term. Considering the cost of capital and the long-term return rate of the stock market, I think an annual premium of about 6% is appropriate.
Annualized premium and discount = premium and discount ratio × 12 months/(contract expiration date - current date)

But if the premium is very high, for example, higher than 20% (annualized), then hedging It makes sense, because the long-term return rate of the stock market will not be so high, and hedging is equivalent to receiving a fixed annual return of 20%, which exceeds the upward slope of the index.

Stock Index Futures Hedging Case
Since December 2014, the CSI 300 Index has set off a major rise, and the stock index futures have an annualized rate of more than 30% relative to the CSI 300 spot.In terms of spot selection, I chose tiered funds at that time.

The reason for choosing tiered funds is that tiers A and B are in a state of super discount at this time. Hedging with short orders in stock index futures can not only earn premium income, but also earn discount arbitrage income from tiered funds.

The final result was very good. Not only did I earn premium income from futures, but I also earned arbitrage income from spot prices.

Thoughts on the high premium of stock index futures
When I chose to hedge against short orders in stock index futures, there were many objections. The most typical voice was that "stock index futures are the weather vane of spot prices." They believed that futures prices were high. Water, the spot price will definitely rise sharply, and if you hedge, you will lose the opportunity to make money.Does the premium of stock index futures really mean that the spot price will definitely rise in the future? At the end of 2014, I wrote an article and shared it with you

Stock index futures should have a reasonable premium relative to spot prices. How high should this premium be? Roughly equivalent to the risk-free rate

Assuming that an investor wants to invest in the CSI 300 Index, he can buy the CSI 300 ETF fund with 1 million yuan, or he can buy 1 futures index with 150,000 yuan, and then use the remaining 850,000 yuan to buy bonds, etc. low risk productsIf the stock index futures and the CSI 300 spot are equal, then rational investors will choose to buy futures + bonds instead of the CSI 300 index fund.

Expressed as an equation:
300ETF=0.15×long futures index +0.85×bond
If the risk-free interest rate is 6%, then the futures index has a reasonable premium. According to the current Shanghai and Shenzhen stock exchange rates, The 300 index is around 3400 points, and the reasonable premium for the month is around 15 points.

In the past two weeks, the premium of the futures index has increased to 100 points, which is converted into a risk-free interest rate of about 30% to 40%. This will inevitably attract a large number of arbitrage orders. The arbitrage model is: buy N× 1 million 300 ETFs, and sell N hands of futures short positions to hedgeCurrently, you can choose IF1501 short order. This Friday, the price premium will still be 120 points, which is equivalent to a risk-free return of 3% a month.

Now comes the problem. A large number of arbitrage orders to buy 300 ETF, or directly buy CSI 300 constituent stocks will cause the CSI 300 index to rise sharply, futures bulls will make profits, and more arbitrage orders will enter. , the CSI 300 Index continues to rise

This is a positive feedback process, that is, the more arbitrage orders there are, the faster the CSI 300 Index will rise.Therefore, in the past two weeks, the CSI 300 Index has been stronger than any other index, and the 28-20 split is very obvious.

If you think about it carefully, in fact, those of us who do futures arbitrage are lending money to those who are long on the CSI 300 Index at a monthly interest rate of 3%, so in essence we still rely on leverage to rise.

Think one more step. In any stock market, borrowing money to trade stocks with a monthly interest rate of 3% will eventually lead to a dead end.Then when the premium of stock index futures converges or even turns into a discount, the arbitrage order will inevitably close the position, that is, sell 300 ETFs or 300 heavyweight stocks, and close the short order.So at this time, the CSI 300 Index will be under heavy selling pressure. If the selling pressure is heavy enough and triggers the selling of margin trading, what will be the result?

The final result was as expected. The CSI 300 Index suffered two sharp dives. After the current index's rise converged, it resumed its upward trend.

Reprinted in "The Road to Low-Risk Investment (2nd Edition)"