S&P futures, fair value, & program trading

D

dr_ma

I am trying to get used to watching the S&P futures and its premium/discount to fair value. I think I understand the importance of this with respect to program trading and day trading. However, in watching the premium/discount to fair value I am seeing that it is negative most of the day and only rarely goes positive. When it does goes positive its only slightly and breifly. I am wondering if I am using the wrong calculations in Reuters to get the premium/discount number or if this just represents the negativity in the market currently. I am getting the fair value number daily from www.programtrading.com and the formula I use is:

SPU.GY - (SPX + fair value)=premium/discount

Does this look correct or is something wrong?
 
most feeds will have the number for you, you just have to figure out what the symbol is. There are like 6 different things it could be depending on the darn data vendor you use.

Using First Alert for example, you just punch in "prem" I believe, then literally when those buy and sell numbers that that programtrading.com use get hit....almost everytime the tick will go nuts when the program trades hit the market.

That is what I observed anyway.

I am trying to figure out how to get prem right now myself since I'm not using first alert currently.

very helpful tool to have.
 
if you can't get a quote on the premium, or if you cannot enter a formula on your platform, it is still easy enough to just put the futures price on your screen right above the cash (spx) price. If you can't do the simple subtraction in your head, maybe you are not in the right business. There are only two numbers to deal with, and the difference between the two is always quite small.
 
Originally posted by dr_ma


SPU.GY - (SPX + fair value)=premium/discount

Does this look correct or is something wrong?
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You don't need the (+fair value) in the formula. You only need to know what fair value is. But really what is important is understanding the significance of these numbers. Knowing what they are is useless unless you know WHY you are looking at them.
 
rs7- you are saying that the formula for PREM does not include fair value in its calculation. If this is true than why do they even give the fair value number on programtrading.com. Why not just tell you to watch the diffence between the cash and futures market?
And don't worry about what business I am in or if I can add and subtract.
 
Originally posted by rs7
if you can't get a quote on the premium, or if you cannot enter a formula on your platform, it is still easy enough to just put the futures price on your screen right above the cash (spx) price. If you can't do the simple subtraction in your head, maybe you are not in the right business. There are only two numbers to deal with, and the difference between the two is always quite small.
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wrong, wrong, wrong. Should you be really giving advice on things that you don't know about rs7?
 
On a related note, does (ES - (X + SPX)), where X is the I-D (whether it should exist or not is beyond me. I'll let the pros settle the ongoing argument), have any significance? Basically, I'm asking if program trading also occures on Eminis.
 
the intraday fair value ( as opposed to the technical fair value) is simply the main contract less the cash and this is on a tick by tick basis - although you would want to always be aware that due to various data delivery issues - it will never be exactly accurate

fair value is for sure a key imput to trading and is a key indicator of the perceived weakness or strength of the market

fair value is not based on the eminis - but just to add another twist - you would want to be aware that emini arbitrage specialists in the pit may cause the emini to be a more accurate guage of the main contract price, than the actual main contract price as indicated by your data delivery

and if you are using last price for your calcualtion - you might want to have a think about the effect of the spread of the applicable derivative

be real careful about the concept of using fair value in order to initiate trades on the back of computer program based trading kicking in - there is so so much more to this than may at first appear i.e. dont try it unless you really understand all the parameters at play
 
Originally posted by stevet
the intraday fair value ( as opposed to the technical fair value) is simply the main contract less the cash and this is on a tick by tick basis - although you would want to always be aware that due to various data delivery issues - it will never be exactly accurate
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Stevet,
I don't believe that's correct:

Premium ($PREM) is the difference between the front month futures SP contract and cash (tick by tick)

Fair Value is a daily value that indicates what premium SP should trade at today, given time to expiration, expected S&P 500 dividends and current short term interest rates.

It's often useful to think of FV as the "center value" that PREM oscillates around. Program trades kick in when PREM is "too high or low" relative to FV.
 
$prem is just a symbol that you can use with some data suppliers to get the intraday tick by tick fair value figure

the other points you made - although not entirely incorrect - are not strictly right either and i can see that you have never used fair value to trade from or had any involvment with trades based on program trading

 
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