This may be a stupid question

[gnome]

Quote from Landis82:

With all due respect, you have shown yourself to have very little understanding about this topic. Your previous comments show that you have little clue about premium/discounts in the S&P Futures.

The premium of the futures contract can swing not only because of "negative" sentiment, but also because of "positive" sentiment, a fact that you failed to mention.

Moreover, when bullish sentiment hits the futures markets stock-index futures arbitrage occurs immediately. And while it may not last long in duration, it certainly is EXPLOITED with an arb strategy, day in and day out by I-Banks with equity derivatives desks, executing a stock-index arb strategy for customer (corporate treasury) accounts and prop accounts looking for an absolute rate of return.

In the above example, futures trade ABOVE what is calculated as "fair value" due to bullish sentiment and stock-index arbs come in to sell the futures contracts against the simultaneous purchases of a basket of stocks that mimic the SPX.

The converse is true when the S&P futures contract trades BELOW what is calculated as "fair value" . . . with stock-index arbs purchasing the futures contract and then simultaneously selling a basket of stocks that mimic the SPX.

While stock-index arbitrage has a tendency to keep the futures near what is calculated as "fair-value" . . . in prolonged Bull or Bear trends in the stockmarket, the futures will tend to trade above or below "fair value" as a reflection of the overall trend and marketplace sentiment.

Also very important to note, there are times when premiums/discounts will occur for prolonged periods due to the fact that the I-Banks may not have the "capacity" to enter the marketplace and initiate the typical stock-index arbitrage. It just all depends on what they have in inventory, and how their customer accounts are all lined-up. If the majority of these customers ( usually corporate treasury accounts ) are totally maxed out for the funds that are allocated to this type of investment strategy, then it is easy to understand that the demand for such arbitrage has been satiated (for the time being)and as a result, the futures premium/discount might not trade as "tight" around fair-value as normally might be the case.

In periods of tremendous uncertainty ( such as Oct. 1987 ) the futures will trade at severe discounts to what is calculated as "fair value", day after day.

At the end of the day, the bottomline is that SENTIMENT does play a significant factor in how the the futures trade around "fair-value".

It's spew like yours that keeps me from ever posting anything about trading... well, hardly ever.

I doubt your hard-on for sentiment will ever make you a dime.

 

[PitchBlack]

Quote from gnome:

It's spew like yours that keeps me from ever posting anything about trading... well, hardly ever.

I doubt your hard-on for sentiment will ever make you a dime.

Exactly.

 

[Landis82]

Quote from spike500:

I don't know the answer either, but i probably make much more money than you do. I learned to understand what the market does,that makes money, the futures premium is to me what it is, but irrelevant for my return.

What makes someone an amateur? Not knowing the theoretical matters or not knowing how to make money?

A question was asked and answered incorrectly.
Your insecurity speaks volumes . . . Big egos NEVER make money trading . . . but thanks for playing.

 

[Landis82]

Quote from gnome:

It's spew like yours that keeps me from ever posting anything about trading... well, hardly ever.

I doubt your hard-on for sentiment will ever make you a dime.

Why be mad?
You answered a question with incorrect information.
Period.

 

[Rodney King]

Quote from Landis82:

Moreover, when bullish sentiment hits the futures markets stock-index futures arbitrage occurs immediately. And while it may not last long in duration, it certainly is EXPLOITED with an arb strategy, day in and day out by I-Banks with equity derivatives desks, executing a stock-index arb strategy for customer (corporate treasury) accounts and prop accounts looking for an absolute rate of return.

At the end of the day, the bottomline is that SENTIMENT does play a significant factor in how the the futures trade around "fair-value".

Well, both Gnome and Landis make reasonable points. But the bottom line is that deviations from fair-value in SP are small and fleeting, and devoured by an infinitude of arbs. Whereas in physical commodities (grains, animals, oil, metals & etc) there are sometimes large, persistent deviations from carry value because of short-term shortages or surpluses that the market "expects" will correct themselves. At times, some physical commods have traded 50% higher in price front-contract as versus next-contract. And a similar phenomenon can happen in individual stocks (PALM during the tech bubble was a celebrated example -- in this case its "futures" price could be observed by looking at its options) because of technical issues.

 

[PORNSTAR69371]

Thx alot landis i appreciate your reply, i guess its like everything else in the stock market where there will nevere be an XYZ formula to come up with what the difference shoud be, i was just trying to understand it a little better it really doesnt apply to me as i just watch the chart, and trade stocks, i just was always curious about it.