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

Posted By Jim On 10/23/2007 @ 8:21 am In Investing | 8 Comments

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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