the point of futures?

Discussion in 'Trading' started by z32000, Aug 30, 2007.

  1. Tell that to the folks who had "portfolio insurance" during the '87 crash. As the market declined they had to sell more index futures, which pushed the market lower, which caused more selling, and so on, and so on......
     
    #11     Aug 30, 2007
  2. Index futures the ultimate tool for manipulation.
     
    #12     Aug 30, 2007
  3. '87, was part accident, part opportunism, part failure of portfolio insurance... nobody knew it wouldn't work because it hadn't been tested.

    Similar to now. Players were levering-up their crappy quality credit instruments with the attitude, "nothing has gone wrong yet, so no worries".

    However, the average noise range has contracted over the years, so I'd say volatility has generally declined since the advent of futures and options. Then again, it might be more due to the fact that everybody has a trading computer today.
     
    #13     Aug 30, 2007
  4. Daal

    Daal

    SSFs are an terrific invention. You basicaly get to buy or sell the stock with much better financing since you can put 20% down and earn interest on the remaning 80%(sometimes on the 20% too). You also get more leverage.
    of course this assumes you know what your doing
     
    #14     Aug 30, 2007
  5. How would you define this average noise range?
     
    #15     Aug 30, 2007
  6. You can eyeball or trial and error with an "envelope" over price. I actually think of it as the "average noise oscillation range"... that is, the market can go back and forth within the range without changing the trend.... all action within is just "noise"... some of it is tradable, of course, but noise nonetheless. That range has narrowed over the years so that it's approximately 6% from top to bottom in the SPX (in the 60's and '70's, it was MUCH larger... and has slowly contracted). Each index has its own range... Nasdaq is larger, XAU is larger still.

    I chuckled when everyone was looking for the "10% correction". Hardly any had been that size for years (decades?).... a few larger, but most smaller... like 6%, max.
     
    #16     Aug 30, 2007
  7. Exactly - with the leverage that futures gives you, just buy up futures and then the stocks will follow cause the computers arb

    PPT loves index futures
     
    #17     Aug 30, 2007


  8. I've taken a specific look at volatility in a different fashion - using a normalized version of the Average True Range indicator. ATR simply is a 14 period average of daily ranges (accounting for any gaps as well). Normalizing just expresses it as a percentage of current price (or an average) instead of as a raw points figure for historical comparative purposes.

    I've got a chart of the S&P going back to 1950 with N-ATR plotted against it. Back in the 50s the readings were very low, the vast majority of time below 1%.

    Things changed in 1962 (Vietnam?). After that, for about the next 20 years, N-ATR was almost never below 1%. Rather the central point of it's range was closer to 2% with frequent jumps above that, once as high as 4%.

    In about 1982 the readings drop down again. Inflation has been brought to heel and financial futures have come in to play. The base level of N-ATR readings is now very close to the 1% level, lower than the previous period but nowhere near as low as pre-1962. The difference, however, is that the volatility of the N-ATR readings have increased. There have been as many spikes in the indicator up toward or through the 3% level in the last decade as there were in the whole 62-82 span.

    The conclusion seems to be that while the base level of volatility has been lower since the introduction of financial futures, the volatility of that volatility has increased. That makes some intuitive sense. The futures might keep volatility down under normal market conditions, but they tend to exacerbate it under unusual market circumstances.

    All that said, I'm not convinced that futures are the reason we've seen lower base level volatility. There are economic considerations as well (like inflation).
     
    #18     Aug 30, 2007
  9. Often when someone wants to defend the role of futures in the marketplace, they claim it dampens volatility. With lots more players and vehicles to trade, it could be true. But whether it is or not isn't important to winning in the markets.
     
    #19     Aug 30, 2007
  10. Agreed.
     
    #20     Aug 30, 2007