S&P futures, fair value, & program trading

Originally posted by stevet
$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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Sorry, steve, I'll have to agree with Vikana on this one. The PREM is the <b>current</b> 'premium' at which the futures trades over the cash index. It has absolutely nothing to do with fair value. The fair value is the <b>expected</b>, or 'appropriate', premium based on the things that vikana mentioned (cash index value, duration till expiration, short term interest rate).

-Eric
 
When doing index Arb... does anyone know which one they usually do first? I know most of the Arbs have a basket program that execute the cash but how do they deal with partial fills? Is it all 100 stocks (for the ndx) or most? Which one is executed first.... cash or futures? Anyone knowledgeable in this area?

 
I know that in Real Tick there are PREM for SP, DJ & NAS for additional charge. Do not really know the value is as simple as the difference between the future & cash, since I have not gone to H & L's formal training class.
 
first paragraph from my earlier post

"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"

u can see that above i used the term "intraday fair value" to denote what you are calling PREM ( the intraday tick by tick fair value ) - and i used "technical fair value" to denote the fixed daily Fair Value as calculated by the use of interest dividends etc

if you want to calcualte the correct intraday tick by tick value of Fair Value - you would have to use multiple inputs to arrive at the correct cash data input of the equation- since cash is not a timely figure

just to confuse it more - Fair Value used by pit traders as their daily Fair Value figure is derived a totaly different way

the "intraday fair value" (PREM) does not move around "Fair Value" as such - it just moves - and it may in fact spend all the trading day above or below "Technical Fair Value"

but like all technical indicators - it does not really matter what u call them - its learning how to trade off them to make sure you move the risk/reward of each trade in your favour - and Intraday Fair Value is one of the most valuable inputs to ensure profitable trading
 
LouiseJefferson

They will have a proprietary system to attempt to get them into the correct side of the trade to move the risk/reward to hopefully the most favourable opportunity - so that if the end up with an unbalanced arb position - they hope the market will move their way to compensate

But the point that u raise is the very reason that tryng to trade off the back of perceived program trading is not a slam dunk!
 
stevet....you've said that everyone else is incorrect on how they use fair value, their understanding of it, etc...would you mind explaining how you use it?

thank you
 
dafugginman

i did not mean it to sound that i was saying that others were wrong in how they use Fair Value or that they are wrong in how they describle it

in fact they had said i was wrong - and i was replying to that

and i said that from the way the responded to my points and teh way they define Fair Value - i could definetly see that they would not be able to use Fair Value to inprove the risk/reward of their trades

using Fair Value to trade off is complex in the same way as trading off SMAs, Bollingers or support/resistance lines

its pretty easy to do when u do it - but real difficult to explain in a simple concise way -and i am kinda geting beaten up just trying to define it - let me think about it and come back to you - i would say though that helping people to learn exactly what Fair Value is , if they are interested in my view of it - is the first step to using it
 
Originally posted by dr_ma
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.
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Premium DOES include FV in the equation. (Spot + FV) = x (we call it the "spoo").
Futures - X = Prem (positive or negative).

Don
 
Not sure how so many knowledgeable people can have such differing views on what the Premium is, or how it is calculated. The only explanation I can imagine is that different people use this term in different ways, as it applies to the futures and cash markets.

As I mentioned in an earlier post, I support vikana's definition of the Premium, in which the Premium is totally unrelated to the Fair value. Instead, the Premium is merely the result of subtracting the current cash index quote from the futures price:

PREM = Futures Index quote - Cash Index quote

I offer the following links to support this definition (the first two relevent links on a Google search):

http://www.elitetrader.com/tr/index.cfm?s=15&t=70
<i>"The absolute difference, in points, between the S&P futures and the cash index has come to be referred to as "the premium," regardless of whether the number is positive or negative."</i>

and
http://ids.csom.umn.edu/faculty/kauffman/courses/8420s98/Project/Programmed_Trading/Example.htm
<i>"To find out if the market is fairly valued at the present time, simply subtract the S&P 500 cash index from the S&P 500 futures price. The resulting number is known as the Premium."</i>

In any case, from the discussion (Don's last post) it appears that the term Premium is also used by some traders to be NET of fair value. In other words, at what level are the futures trading above or below the expected fair value premium. Although I have never personally heard of the Premium term being used in this fashion, it appears that this is another variation that some traders use for the term Premium.

It doesn't really matter what definition you use, so long as you understand what this definition means, and how to use it, and how it is defined by your quote vendor. I'd be interested to hear if anyone knows of a quote vendor that defines their PREM in the way that Don and steve uses it. Could be confusing if various vendors define it in different ways.

-Eric
 
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