The Idiot's Guide to Premium and Fair Value

sambatrade · Apr 16, 2003

bond basis is the same thing, just futures minus forward cash price.

rs7 · Apr 16, 2003

Quote from sambatrade:

bond basis is the same thing, just futures minus forward cash price.

Yup. Thanks for being more concise than I tend to be

(Grad school journalism really screwed me up....made me believe I could write)

Quote from garbo:

rs7:

You do take PayPal?

PayPal, Green Stamps, Confederate money, good and bad checks, Visa, MasterCard, IOUs, and empty promises are all acceptable. (except for Don Bright, who can afford genuine cash...hey Don...??? Don???)

Peace,

Rs7

marcD · Apr 16, 2003

Quote from rs7:

PayPal, Green Stamps, Confederate money, good and bad checks, Visa, MasterCard, IOUs, and empty promises are all acceptable.

Monopoly money?

Good post. Thanks.

MarcD

bungrider · Apr 17, 2003

Quote from rs7:

Wow, my most esteemed Brother Bung....couldn't you have come up with a more exotic question?

I don't understand exactly what you are looking for. Do you mean as fair value relative to SSFs? Or against a tracking stock like the DIAs? or SPYs?

My head is spinning from the confusion! (is this what Dubya feels like all the time?) (uh oh, hope the righties don't get offended)

Anyway, I will give this some thought when the passover wine wears off!

Peace,
Rs7

hehe

What I was curious about was the fair value number for individual stocks. This is what I hear about when people like DB talk about trading openings. I have never traded openings, but it was my impression that based on where the S&P (or whatever index the stock of interest trades in, if talking about a euro-stock) opens, each stock should have a theoretical fair value, based on the S&P opening price and that stock's weighting in the S&P. For example, if the S&P opened today 1% higher than yesterday's close, then I'd expect that GE, CSCO, and all the other heavily weighted stocks in the S&P should also open 1% higher, thus producing a fair value for that individual stock based on the value of the futures. But I don't know how to get that number, and it would be useful if I wanted to, say, arb a large component of the S&P against the futures contract. How to get the fair value for an individual stock based on the S&P number is what I'm after.

Thanks in adv,
-b

spreadem · Apr 17, 2003

Makes you wonder how it is that a company in south Florida can get away with charging $2800 for a seminar to tell people about program trading?

MWS417 · Apr 17, 2003

I have been reading posts here for months. I never bothered to register before now. I wanted to express my gratitude for this explanation.

While I had a slight idea what premium and fair value were about from CNBC, I really didn't know why they had the significance they do. I only knew more was better. But not why. Now I do.

Thank You,
Michelle

harrytrader · Apr 17, 2003

Yeah the Mormon Church, and if you don't know Metastock is an enterprise of Mormon Church. I learned from a client who is their partner wharf !

Quote from rs7:

the Mormon Church (yep..the Mormon Church)

rs7 · Apr 17, 2003

Quote from bungrider:

What I was curious about was the fair value number for individual stocks. This is what I hear about when people like DB talk about trading openings. .....-b

Brother Bung,

I think you might be better off asking DB himself. As far as I can figure, what you are looking for isn't really a "fair value" but more an "anticipated" opening price. I am not really sure though. But if this is the case, I guess you would look at early indications. So if the S&P futures were up 1%, and GE was indicated to open flat, I guess that would mean GE would be bought? Or if GE was indicated up 3% it should be shorted at the open?....Really guessing here, since this is not a strategy I have used, or am familiar with. I really think this is a good question for DB.

Only opening strategy I have used pretty successfully is when a stock is indicated to open (gap open)....so let's say the stock closed the day before at 50, early indication is 51, then gets raised to 52, then 53, then 54--54.5, I would try to short it at the open with a limit order somewhere between the 54 and 54.5, having experienced that usually the specialist is more often right than wrong with his original indication (which in this case was 51). More times than not, the price will get to, or closer to the original indication. Only problem with this strategy, if you are wrong, you gotta get out quick. Because you can be very wrong. Still, I think it is a very high percentage play. Same thing works on buying stocks when the indications keep dropping.

I don't think this really addresses your question, but I hope it helps anyway.

Peace Bung,

Rs7

SlowerPussyCat · Apr 17, 2003

Quote from rs7:

so let's say the stock closed the day before at 50, early indication is 51, then gets raised to 52, then 53, then 54--54.5,

Where do you see these indications? (or how??)

SPC

rs7 · Apr 17, 2003

Quote from rs7:

Why does it not matter if the stocks go up or down? This I can leave you all to figure out for yourselves. And if the "premium" goes to, let's say, 50 cents, then we BUY the futures, and SELL the stocks. Same thing as our "buy program" except it's the mirror image. We will still close the position at the $2 "fair value" premium. (in a sell program, we start with a debit rather than a credit).

I think I should have mentioned that there are exceptional exceptions to what I said about sell programs. I said that in a sell program, there is a "debit". However, it is not that unusual for an extreme condition to exist, as in the hypothetical one I talked about (fair value being $2). Sometimes the futures will sell off hard enough that the price of the futures, even though they "should" be above the cash price (in this case +2, goes below the cash price. So in this instance, the "sell program" is initiated at a CREDIT rather than a debit, which is the most appealing scenario for a sell program.

More free money for those that can execute these.

Peace,

Rs7