Leung, futures are highly leveraged. The performance bond (margin) required for the San Diego contracts is ~2K (one contract is ~75K). Also, futures are “marked to market” daily, so should you sell a contract, and it increases in price, for any reason, you will have to put up more money.
So, even if the CSI closes down 20% in the next 9 months, but prices rise/fluctuate in the interim, you will need more capital to meet margin. Add to that the lack of liquidity and you will be taking on an awful lot of risk if you can’t hold until settlement (and that’s assuming that the market declines more than the 4-5% current discount).
I’d also make sure to analyze how the underlying CSI works in detail. Since this index comes out once a month and is not really “commoditized”, it will be impossible to gauge what the current value is day to day. With no ability to arbitrage the index, prices could theoritically be manipulated.
I still think it is any interesting, and potentially profitable way to play the decline, but it sounds like you need more risk capital before considering it further.
Chris J. appears to be a pro futures trader, so I would ask him what the appropriate capitalization would be to enter into a contract (under the assumption that SD RE will plummet near term & with the intent to hold until settlement).
