S&P Fair value

Discussion in 'Trading' started by Nunix, Oct 3, 2006.

  1. Nunix


    I've been trying to find a way of getting S&P fair value daily. I know of sites like indexarb.com and programtrading. But I don't have a clue as to how to get the fair value from there. Fro example, I get the previous day's day fair value from CNN.com and it's at 1338.52 . For some reason the fair value for today is not updated, where can I get the info then? When I checl on Indexarb.com, it give a price like $9.20. So, do I add $9.20 to 1338.52 or do I subtract that? How do I derive the fair value from the info from Indexarb? I really need some help with this .. thanks!
  2. I'm assuming you are speaking of Fair Value for the futures contract versus the cash market. In other words, you are trying to figure out where the futures should be trading relative to the current index price. That is very simple: The index price fluctuates based on the 500 stocks and their weighting. This can be created from scratch and will duplicate what the exchange disseminates. Once you have the cash index value, you just add the "basis" or "premium" and you will get the fair value for the futures contract.

    For example, right now the S&P 500 index closed at 1334.11. Using Indexarb's website, you can see that the premium is 8.87. Hence, based on the cash index, the fair value for the December 2006 S&P 500 index contract should be 1,343.00.

    The relationship between the futures contract and its cash index fluctuates, so it is not wise to just trade based on fair value alone because you don't know which one is leading the other at the moment.

    Does that help?
  3. So is there any way to combine the difference between the cash and the futures for trading with MP? In other words does one of the contracts lead the other at critical "levels" or are they too close in value during the trading day?
  4. Look at the MP for both the ES and SP cash. Compare where they are relative to each other during the development process. This is very important. For example, if SP cash has had a range extension and ES hasn't, then you might consider watching to see if ES will extend in the same direction.

    Typically, the futures are going to be faster to react and will cause the bigger components of the index to follow. Why? Because it is a heck of a lot easier to buy/sell futures than it is to buy/sell 500 stocks or to short the major stocks (SEC rules). However, when a heavily weighted component (currently GE and XOM at the top of the list) gets effected by geopolitical, fundamental or other data, then the futures will follow the index for a period. For example, oil falling $2 might sound great for the economy, but if XOM (the top component of the S&P 500) is down 4%, then the index will go down with it and will drag the ETF's and futures down.

    I watch both.

    I hope that provides some clarity.
  5. duard


    Futures will arb toward cash and vice versa causing a diminution of volatility. The thing to watch for is persistance in the spread with regard to cash/futures during a move. That means in spite of the arb money flow is continuing in the direction of the spread.

    I hope that makes sense.
  6. thanks for the sudden responses...

    looks like both you guys have a pretty good grasp on what you are trying to imply...it seems as you are certainly speaking from experience do the the fact that you use words like "flow" (duard) and "development process" (ft71) ...but i'll try to set something up and see if anything clicks...thats pretty much the only way to get it i guess

  7. Remember that it takes time and very close observation to understand how the different parts interact with each other. If you use market profile, then make sure you truly understand what the profile is saying. If you can, zoom out and look at a few days and then formulate a plan for how you will proceed for the day given where you open and other such factors.

    Learning to use this stuff effectively takes time and diligence. Come up with your own ideas and see how they work. Don't worry about how anyone else is doing things and how well they are doing with it.

    Good luck.
  8. duard that is spot on

    i keep track of how many positive premium divergences (related to fair value) vs. negative ones there are in a day that go above the program buy/sell threshold

    GENERALLY speaking, if futures are spending more time in the upper fair value range AND/OR generating more program trading (exceeeding the range), this is a good indication of heavy continuous buying pressure.
  9. duard


    It can also tell you when a reversal is imminent. If the spread swings from an average value from above to below then enough juice is flowing countertrend to effect a reversal.
  10. Charly



    duard + FT71

    It would improve my understanding of this concept (makes much sense to me) if you would be kind enough to provide one or more charts of what you said.
    (you know: pictures vs. words)

    Thanks for caring.

    #10     Jan 11, 2007