s&p futures/index options question

JackRab said:
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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I somehow missed the part where he said he was short the cash.
 
stepandfetchit said:
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.
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This is not correct. SPY is a security. It's dividends get paid out on ex-div date just like a stock. SPX is a cash index. And like ALL cash indices, you have to calculate the net present value of all the future cash flows to the present. THAT is why the SPX trades at different levels from SPY. The reason ES and SPX are not the same is because of the time value of money. If I buy ES futures that is roughly 107,000 notional yet I only have to put up about 5k in margin. That means I can invest the other 102,000 in the short term rate market and earn interest on the cash. You will see if you do that, the value of ES and SPX are equal.
 
To add to what Maverick described, you can google the somewhat inappropriately named "cash-and-carry arbitrage" to get a detailed explanation of how it all gets priced.
 
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