s&p futures/index options question

R

robert111

Hi, I had an idea for trading, but wanted to get some of your insights. The s&p futures is trading about 7 points below the s&p index right now for the September futures. My question is: at expiration do the futures go up until they are trading even with the index? If so, could you simply go long the futures and short the index? Am I missing something important?

Thanks.
 
robert111 said:
If so, could you simply go long the futures and short the index?
More...

Let's think it through. Go long future, easy. How would you "short the index"? Would you go out send sell short 500 stocks? What is that cost? You will have commissions, short interest charges on hard to borrows and dividends to pay. You can bet that those costs are close to the discount you see for a large trading firm. Now consider that your costs will be higher. Not going to work.
 
It's the expected dividends that make the futures lower than the index.
S&P500 is a price index... when stocks trade ex-dividend, the index level is lowered... but you hardly see that happening because on average it's 2 companies that go ex-div on a given trading day.

So, in a month when lot's stocks trade ex-dividend... the futures will be significantly lower than the index. There's no arbitrage opportunity here, unless you think the dividend is priced too low or too high.

Some indices are calculated on preformance, so dividends are basically re-invested and the futures will trade above or around the index-level... the interest rate is the only factor in that case.
 
Robert: My advice, is take all information you receive here with a grain of salt. Some people THINK they know things, but are still missing some important details. If you examine SPX VS SPY you will observe that SPY exhibits the Dividend effect (price drops by the Dividend amount on the dividend date), but SPX does NOT! The ES futures seems to track a 10X SPY price more closely than it does with SPX. Check it out for yourself. I agree with Jack on "no free lunch", however.
 
@stepandfetchit, are you serious? SPY is an ETF which tracks the S&P index... which makes it a derivative... I don't know the exact calculations of SPY, but the index is leading...

SPY total value traded yesterday was 19 bln, and the ES sep future, which is the most liquid S&P500 derivative had 182 bln traded value...

Which means, the index leads ES futures, although it often is the other way around, and SPY comes last.

You are right about that some people THINK they know things though...
 
To add to all of this, even if the futures are trading below cash, the cash AND futures can both sell off (this would mean you would lose money being long the futures, regardless of whether the cash market is trading slightly above).

EX

You're long ES futures at 2000.00 when cash is at 2007.00

During the time that you're waiting for expiration, the market sells off, cash closes at 1980 and futures expire at 1980. You lose $1000 per contract.
 
DirectMarketAccess said:
You're long ES futures at 2000.00 when cash is at 2007.00

During the time that you're waiting for expiration, the market sells off, cash closes at 1980 and futures expire at 1980. You lose $1000 per contract.
More...

No... if the expiration level is 1980 you make 7 points, since long F at 2000 and short Cash at 2007. If you hold until expiry, at the closing auction you need to buy back the Cash position at market... and then the Future settles at that level.
 
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