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S&P Futures vs Fair Value: -5.5, What Does That Mean!?

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Yesterday I was telling one of my friends that the futures market for the Nasdaq and the S&P were down. He remarked that while he understood the idea of futures on a conceptual level, he didn’t really know what it meant when it said -14 or -12 S&P futures vs. fair market value. As I tried to formulate a response, I actually didn’t really know what the difference was. I did a little research into what those values meant and while I’m not 100% confident in my response, I wanted to put it on the site and hopefully you all can tell me I’m right or wrong.

S&P futures vs fair value: +4.8. Nasdaq futures vs fair value: +12.3. .

A futures contract is it’s an agreement to buy or sell something at a particular price on a particular date in the future. So in the case of the S&P futures, it’s a security pegged to the S&P’s performance and that’s what’s up for sale. A future is a lot like an option except with an option you have a choice in whether you want to exercise the option. With a future you are obligated to exercise it, so you are obligated to buy or sell that security on the particular date.

What does it mean when the future is priced at 5.0? I believe each futures contract is for 100 units (option contracts are like this) and the price is specified in units, so that means to buy the futures contract you would need to pay $500. When you say that the S&P futures are trading at -14 to the fair market value, that means, after you factor in interest and dividends, a contract is selling for $1400 than the fair market value of the contract.

Ultimately, what can I do with this information? I’m not entirely sure other than the general notion that investors believe the market will go down. If they are trading for above fair market value, then in general investors believe the market will go up. I don’t think you can read anything other than a general notion from those values, even if you compare them, because there are so many other factors. For example, pre-market yesterday (Monday 22nd October 2007), the futures were down in the negative low teens and the market ended up for the day after being down to start.

If you have an experience or information to share, please do, I’m a complete novice in this and would love to hear from some more experienced folks out there.

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8 Responses to “S&P Futures vs Fair Value: -5.5, What Does That Mean!?”

  1. MoneyNing says:

    Learned something new today! I actually think that sometimes we have so much information that it doesn’t do us any good but it’s always good to know more anyhow!!!

  2. Vince says:

    Where can I find the S&P vs. fair value figure everyday before the markets open every day at 9:30 eastern time?

  3. Paul Lepage says:

    The information in this post is very wrong. The simplest way of looking at it is that the fair value is a way of finding an approximate equilibrium between the stock market and the market for lending (interest rates). None of your half assed calculations in this post make any sense.
    Take a look at indexarb.com if you want to learn more about fair value.

  4. Dunce says:

    MoneyNing, you should not have been so quick to think that you learned something. Jim Wang was not sure and was asking for the answer himself.

    Vince and Ed English had there own little conversation.

    So Paul Lepage Your second to last sentence was uncalled for. The rest was good. Thank you for your last sentence.

    • Matt Joffe says:

      MoneyNing , thanks for putting yourself out there ! Paul Lepage a little uncalled for for just pointing to a website that went on nut doesn’t conciesely answer an honest persons question … so :

      Usually when fair value is refered to it is regarding the fair value of the futures contract and the futures versus fair value is really just the futures versus the fair value of the futures.

      Taking a step back , the “spot” or instantaneus value of the index, in this case the s&p500 is just the spot value of its individual constituents added together. During times of peak liquidity ( when the US Markets are open) this is usually refered to as the last taded price of the individual constituent which sums to the index spot but things can be viewed in a slightly different light by looking at the best bid and best ask of the index ( usually with a comparitive amount of notional to the value of a futures contract which we’ll get into a second. The mid point of these 2 could be used as the fair value of the index …

      Now to futures on the SP500. THere are 2 different sizes of contract one is 50x the index close at the futures date (the emini) and the other is 250x the index at the futures date. Both are traded on the CME electronically ( I believe 6 out of 7 days a week 24/7 ) and I also believe next to currencies and US Treasuries are the most highly transacted intrument in the world.
      Now index futrures usually have a September / December / March / July expiration and I believe it is the same as most other futures and options contract which is technically the satrday following the 3rd friday of the month ( athough Friday is the last trading day).

      Most of the open interest is in the “front” month or closest to expiry and only a few trading days before the expiry does the open interest “roll” to the next expiration.

      Now to get to the theoretical arbitrage free fair value price of the future ….. The fair value price of the future would be the price assuming the value of the index didn’t change at all between now and the expiration date but also discounting for the timevalue of money or basically taking the amount of time untill the expiration of the front month and reducuing the spot of the index to what you would have to put in now to end up getting the value of the index being paid intrest in accordance with the risk free rate corresponding to the amount of time and the currencey of the index. In this case the us treasuey yield cureve is usually used ….

      Now if the actual futures market is trading at one price the fair value of the futures would be the last index price discounted the time value between now and the futures expiration.

      I could go on into index arb buty yhay really has to do with taking advantage of either the difference between the index spot bid and the fair value of the futures spot ask or the index spot ask and the fair value of futures spot bid. If either of these exceeded the transaction cost and a certain degree of risk taking place due to very short term market volatility … You could make money in a guarenteed fashion.

      Let me be very clear that no individual investor could accomplish this task. Not only does this require huge amounts of capital but, almost zero transaction costs due to either being such a high volume prime-brokergae customer or an actual exchange member AND extremely low latency … the amount of time from getting the quotes to acting on them and having them execute is extremely low ( accomplished through low latencey co location )

      Anyway thats my shpeel on index futrures any questions let me know. I have traded professionally bilions of dollars worth of them using high frequency strategies in my time …

  5. FICKLE FOX says:

    THINK OF THE S&P FUTURES AS A WAY OF GUAGING THE WIND SPEED OF THE MARKET. FOR EXAMPLE IF THE S&P SAYS +5 MULTIPLY THAT NUMBER BY 9. THE WIND SPEED OF THE MARKET IS +45(MPH), YOU WOULD THINK OF CALL OPTIONS. IF THE S&P FUTURES SAY -10 MULTIPLY THAT NUMBER TO GET -90(MPH), YOU WOULD THINK OF TRADING PUT OPTIONS. DEPENDING ON WHICH WAY THE “WIND SPEED” IS WOULD BE THE DIRECTION YOU WANT TO TRADE. THE HIGHER THE WIND SPEED (LIKE DRIVING A CAR), THE GREATER THE CHANCE THAT THE MARKET WILL BE GOING IN THAT DIRECTION FOR THE FIRST HOUR OF TRADING (9:30 AM TO 10:30 AM EST). IF IT IS +2 OR -2 X 9 = 18 (MPH), I PERSONALLY WOULD NOT TRADE BECAUSE IT MEANS THERE IS NO WIND IN MY SALE TO TRADE.

  6. Bob says:

    Please tell me how to read http://www.cnbc.com/id/17689937 futures report. How is an index close of 1413.58 compared to current future of 1415.25 a change of 6.0 below? And to which number in the second group should I apply the -2.52? The futures are trading 8.52 higher than their fair value close (I get that). But how do I read the -2.52 and what number below do I compare it to?

    E.G., S&P 500:

    FUTURES
    Index Close Cur Future Change
    1413.58 1415.25 6.00

    FUTURES FAIR VALUE (-2.52)
    Fair Val Close Cur Future Change
    1406.73 1415.25 8.52


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