The Idiot's Guide to Premium and Fair Value
- Thread starter rs7
- Start date
I didn't vote because there is no option "I agree with most of it and I am sure it helps others, but I have not learned anything new."
I do have one question though: You speak of "time value". This detail has never crossed my thoughts before. Why would futures have a time value? Maybe there is some extreme case that I have never taken into account, but the way I have always seen it is that the premium is non-zero because of only two facts:
1. If you buy $200k worth of stocks and hold it until the futures expire you will not get paid the $1000 in interest that you would otherwise get on the cash.
2. All the stocks that pay dividends between now and futures expiration will put a certain amount of cash (let's say $2000) into my account if I own the aforementioned shares worth $200k.
And that's it. No time value in my model of reality.
OK, as I said in the original post, there are probably many here (like yourself perhaps) that have a better grasp than I do on this issue. I could be completely wrong about "time value" being included in the calculation of "fair value". I guess I just assumed (not unlikely wrongly) that there was a time factor involved....non intrinsic value like in options. After all, a contract does give you leverage on a basket of stocks deliverable at a later date. So in that respect there is a degree of similarity between the contracts and an option. But, again, I am not certain if this is factored in..
In reality, when I worked for a trading company that did this kind of trading, we just got "the number" from other sources (in our case it was from Merrill Lynch). We also had a very good feel just by watching the average spread intraday compared to the published fair value. Sometimes the spread seemed to gravitate to a slightly higher or slightly lower number than that at which Merrill had it pegged. This was, to us, just a factor of a stronger or weaker day in the market overall. Nothing is exact. Nothing is perfect. At least I don't think so.
Great question, and thanks for bringing it up. I will try and find an answer. And thanks for contributing.....any time I can learn something....or any time I can be made to learn something, is time well spent!
Peace,
Rs7Yeah, sorry I did not make the poll a little more comprehensive. I saw the default (4 choices) and winged it. Next time I will consult an expert like CandleTrader if I ever do a poll again.
Certainly a poll was not on my mind at all when I wrote the post. As I said, it was an afterthought, and a lighthearted one at that.
Besides, at this point about half the people have said they are sending me their money. Yet so far, I am a few days poorer than I was when I set up the poll (staying hopeful though).
Quote from rs7:
Besides, at this point about half the people have said they are sending me their money. Yet so far, I am a few days poorer than I was when I set up the poll (staying hopeful though).
That's America for you! In other countries, mail-order businesses usually send out their merchandise before a customer's payment has cleared, but the US seems to be a nation of empty promises when it comes to payment. Over here, when you certify under penalty of perjury that you will pay a certain amount in consideration for a certain product it really means you are thinking about taking a closer look at the product. When you write a check and give it to your supplier it means you are thinking about taking a closer look at paying the sum stated on your check in order to get the product. And when the check finally clears it means you have made up your mind to go through with the purchase.
Quote from rs7:
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.
Rs7,
When you're doing this strategy, do you take into account the pre-market premium/discount? If it's extremes, you can have a TON of specialists posting pre-market indications. How does that affect your strategy?
Cash
It's true that when there is a huge premium or discount to premium in the Globex futures you will get a lot of pre-opening indications. But it is not really an element of this strategy. What matters is when an individual issue's indication moves a lot. Usually happens on a stock that had news. When the whole market is going to gap it is kind of hard to pick them out.
When a stock has a delayed opening it is easier to find the indications. What works best, seems to be having a room full of people looking at indications (not too viable when doing remote trading). Often, on a news scroll, you will see order imbalances. With some data feeds the closing price will flash when there is a change of indications (I know I see this on Reuters). Mostly though, we look at stocks we know will gap one way or another on earnings or news, good or bad. Watch them, and see if they change. These stocks will seldom open at 9:30. So it's important to try and spot the earlier indications.
Peace,
Rs7So, when there is an extreme in the Globex, might the stocks you are looking for have even more of an extreme in their pre-market indications?
When a stock has a delayed opening it is easier to find the indications. What works best, seems to be having a room full of people looking at indications (not too viable when doing remote trading). Often, on a news scroll, you will see order imbalances. With some data feeds the closing price will flash when there is a change of indications (I know I see this on Reuters). Mostly though, we look at stocks we know will gap one way or another on earnings or news, good or bad. Watch them, and see if they change. These stocks will seldom open at 9:30. So it's important to try and spot the earlier indications.
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Are you saying that you have some sort of new service that shows imbalances pre-open? (not just indications).
Also, are you saying that stocks with news may be better plays for this strategy?
Thx,
Cash
Very possible, but usually (since I have been primarily an overnight trader) I am more concerned with getting out of positions good or bad when there is an extreme move in Globex.
This seems more like a Don's Openings play as you describe it, so you should be telling me
Yes, Reuters will show an imbalance if it is newsworthy. But the "flashing" is our real alert. (prices flash when indications are posted or changed).
Yes....news is what causes big gap opens (up or down) on individual stocks...which is really what I am talking about...not gap openings on the entire market. You want the standouts in a dull market as the optimal set up.
Peace,
Rs8.5