The Great European Dividend Futures Caper

This is not investment advice. Ex ante, there’s a good chance it constitutes a cautionary tale, and is the exact opposite of investment advice. It’s a story about a non-derivatives expert doing derivatives stat arb for fun. Those stories tend to end badly. Please do your own research, avoid taking dumb risks, and don’t come crying to me if a bug in my Excel or Python model is the reason you got a margin call.

In the interest of full disclosure, I am doing a version of this trade right now. YOLO.

Financial engineering is a lot like running a slaughterhouse. You have some cuts that are valuable, and some stuff you grind up and stuff into sausages, and some odds and ends end up being somewhere really weird — until the development of recombinant DNA, the main source of insulin was crushed pig pancreases.

Sometimes, this leads to interesting arbitrages. As a broke bachelor, I was delighted to discover that chicken is very cheap indeed if you’re willing to eat chicken liver. And in the futures market, there’s some very affordable chopped liver I’ve decided to take advantage of: European dividend futures. (I first heard about this trade by reading Harley “The Convexity Maven” Bassman in this post. Bassman gets 100% of the credit for noticing the anomaly; I’m just looking at the theoretical implications and the exact way to put on the trade.)

Specifically, I’m long some Euro Stoxx 50 dividend futures, which I may hedge intermittently by shorting futures for the Stoxx 50…