Fair Value and Futures

Discussion in 'Index Futures' started by vinigar, May 9, 2002.

  1. vinigar


    How is Fair value and the futures used to trade effectively for premarket? Is there some fancy set of calculations? Or, is this not necessary....do you just need to know what the fair value is and what its relationship is with premarket indicators? Where do you get this information? How is it used with various trading strategies? How can it help you?:)
  2. You really don't want to be trading "pre market" --- but you will see the Globex futures trading at a "price"....that "price" is either above or below the "spot" price of the index. You simply add the spot price to the day's "Fair Value" number, get that total to see where the futures "should" be trading. Wherever they are trading (above or below that number) shows you where the market will open. Pretty simple concept, useful for opening only trades, and then again all day for entry and exit points.

  3. acrary


    According to the CNBC site, fair value is:

    ...the value of S&P 500 Index, plus the interest I pay my broker to buy all of the stocks in it, minus all of the dividend checks I get from those stocks.

  4. vinigar


    Thanks for your reply. Next question...hows it all fit in with equities? Nasdaq etc.?:)
  5. You're asking quite a lot here. We spend a lot of time with just the basic concepts in our class (but I don't want to sound like I'm selling anything).

    If the market is composed of stocks, and the futures are composed of stocks as well.....wouldn't it make sense that if the futures are trading well above FV, then the stocks might follow?

    The futures traders will sell futures over FV, and if they cannot buy them back cheaper, they will simply buy the underlying stocks, en mass' to hedge themselves.

    That is a very basic explanation to give you an idea of how we use the futures and FV.

  6. vinigar


    Thanks for sticking your neck out to give me a hand... I appreciate it. Maybe some of the piranha in here will leave you alone. I know that this is a effective technique used by many pro traders. However, like you say, if you must spend a lot of time understanding and learning to use fair value effectively...it must be to involved for me. Being ignorant about this I did not realize that I might be asking to much for a quick reply. I generally trade the markets after they are open. Of late I have been thinking about jumping on board premarket in the morning. I trade equities. I always hear on CNBC about Fair Value...being ignorant I was wondering how it could be used to decide as to go long on a stock premarket or not. So being stupid and not knowing I think it goes something like this...If the fair market value is above that of say the NAS futures then you'd go long. But then how would I know...this is probably all screwed up.:)
  7. matthew


    Don and Vinigar,

    I've never understood why the difference between cash and futures (basis) would be of any interest to anyone other than someone who does arbitrage between the two.

    I used to be an arbitraguer and we'd fight for a tick. No room for an outside trader to glean information from a spread that's efficient down to a tick or two, and more important, no way to use the information. The only truly inefficient basis I've ever seen was when the NASDAQ futures contract was brand new and I was the only arbitrage operation. To put a time frame on it, at the time, Apple Computer was over 20% of the index.

    If someone is trying to judge the opening of a market, they'd be better off watching the price of the electronically traded mini indices.
  8. Floor traders view things considerably differently than brokers or those on the "other side" of the market. Since we trade for short term and immediate profits (real or theoretical), you'll see that one cannot trade effectively without following the relationship of the futures to the spot price....immediate market direction is one of the key reasons to enter into a stock position.

    When futures traders need to buy all 500 S&P stocks, wouldn't it be nice to be slightly ahead of them, so they will now buy from you?

    Good Luck!!

  9. MD-doc


    Well, first you should know what Market , would like to be Trading ? Nasdaq or NYSE ?

    -in case of Nasdaq stocks, you should follow in pre-market Nas Futures( COMPX symbol on iqc.com ), closely related to sectors
    ( SOX, GSO, etc). Then, go for the strongest (+1%) and/or the weakest ( -1% ) sectors !
    - in case of NYSE stocks, then you need the SP500 Futures and
    Cash, Fair Value, Premium/Discount, etc.

    In case you decide on NYSE stocks, the best education available,
    out there in the jungle, are Don's classes !

    ONE THING : do not imagine, that you will digest all this info,
    about Fair Value, in a couple of explication lines or a few hours
    of reading. You really need a professional, to guide you, AT LEAST,
    at the beginning... Otherwise you'll pay your tuition, to the Market, if you forget to do your Due Diligence !!!

    Hope all this helps !

    #10     May 10, 2002