I'm sure there is a really obvious answer to this, but I couldn't find it... Anyway, I was looking at a few stock futures today, and noticed something a little odd... the stock future's price was quite a bit off of the actual stocks price. This specific stock is an ETF (no dividends), so what am I missing?
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Stock Futures vs. Underlying
- Thread starter tgtrader
- Start date
Quote from tgtrader:
I'm looking at FAS. Take a look at OneChicago for the stock future prices.
SPX future is also off by few points.
Unlike options, futures are done deals and always exercise at maturity if position is not closed. Also there is no possible exercise/assignment before maturity. So the price of future contract will follow the price expectation at maturity and has very little to do with current price. Current price will affect the expectation but doesn't contribute to the pricing directly.
Quote from TraderSU:
SPX future is also off by few points.
Unlike options, futures are done deals and always exercise at maturity if position is not closed. Also there is no possible exercise/assignment before maturity. So the price of future contract will follow the price expectation at maturity and has very little to do with current price. Current price will affect the expectation but doesn't contribute to the pricing directly.
Yeah, I understand that they are done deals, but I don't think they should reflect the expected price at maturity... Why wouldn't someone take a position in both the future and the stock, wait until maturity (or when the prices converge), and pocket the spread?
The spread between the spot and futures is the cost of carry. The cost of carry includes the interest rate less dividends. For the S&P futures, given that the interest rate is effectively zero the dividends cause the cost of carry to be negative and thus the futures trade below the spot.
This principle applies to all futures. There is not arb here!
This principle applies to all futures. There is not arb here!