S&P Futures vs Real S&P

[webart]

I'm wondering why the S&P Futres don't ever over or undershoot the real S&P, they seem to track so closely, during market hours. I would have thought that being more predictive that sometimes the Futures would be worng ? After all the S&P is made up of 500 companies, with all of those prices making the final index price, whereas the S&P Future Index is just one contract.

 

[One Eyed Shark]

The futs do over/under shoot the cash each and every day.

Need to dig out a chart for the "premium" , the arbitrage guys make very serious money out of these small oscillations.

 

[Directional]

they seem to track so closely, during market hours.

they do track very closely, but not EXACTLY. The small diffences are how the arb'ers make their dough.

After all the S&P is made up of 500 companies, with all of those prices making the final index price, whereas the S&P Future Index is just one contract.

One contract priced on the value of the underlying same index of 500 companies.

 

[rjoyce]

As I understand the mini's are only guaranteed to be equal to the index they follow on expiration date. So the osillation between a mini and the index it follows must be the difference in 'sentiment' of those who trade the mini much in the same way as the OEX has an 'oscillating' relationship with the S&P. Now the volumes on the major mini's plus the fact that for the most part the players are the same people especially the large players who use the mini's for hedging allow for the mini to move more or less in lock step with the indexes they follow. The mini's unlike their sister 'options' have no 'time value' which diminishes until expiration and ultimately they expire worth less. I guess the mini's achieve this same result by guaranteeing the mini and index will be equal on expiration day. Well I hope this makes it a bit clearer and I'm not sure I have it right either. I would appreciate comments any of you might have.

 

[Rhody Trader]

I'm wondering why the S&P Futres don't ever over or undershoot the real S&P, they seem to track so closely, during market hours.

As Arbitrageur indicated, the futures and the cash are kept closely in line by the arbs who jump on any meaningful mispricing to lock in a guaranteed profit.

I would have thought that being more predictive that sometimes the Futures would be worng ?

Who says the futures are predictive? The price of the futures contract is basically just the value of the underlying, plus the carry (accounting for interest and dividends in holding the basket of stocks). There's no prediction involved. If there were no arbing going on, then maybe things would be different, but that's not the way the market operates.

 

[rjoyce]

Rhody, I appreciate what you are saying about arbitrage, but how does it work. Let's say for example the mini Dow is trading 30 points difference from the Dow, intraday. How does an arbitragueur make money or 'lock-in' mispricing for a guaranteed profit. Thanks Robert

 

[Rhody Trader]

Rhody, I appreciate what you are saying about arbitrage, but how does it work. Let's say for example the mini Dow is trading 30 points difference from the Dow, intraday. How does an arbitragueur make money or 'lock-in' mispricing for a guaranteed profit. Thanks Robert

Assuming that 30 point difference is in favor of the futures (meaning futures above cash) then the arbs would go short the futures and buy the underlying stocks. They could either then hold to contract expiration or reverse the trade when the spread narrowed to be more in line.

 

[Directional]

the arbs would go short the futures and buy the underlying stocks.

this could also be done using the ETF (ie: SPY or DIA) rather than buying the whole basket of individual stocks.

 

[Rhody Trader]

this could also be done using the ETF (ie: SPY or DIA) rather than buying the whole basket of individual stocks.

Though in the end the money will probably at some point flow into (or out of) the stocks because if the arbs are shorting the futures and buying the ETF they could put the ETF out of line with the underlying stocks.

 

[Directional]

presumably someone arbs the ETF against the stocks too?

 

[rjoyce]

Assuming that 30 point difference is in favor of the futures (meaning futures above cash) then the arbs would go short the futures and buy the underlying stocks. They could either then hold to contract expiration or reverse the trade when the spread narrowed to be more in line.

Thanks Rody I appreciate you explaining that and so this type of 'arbitrage' is available on all os these stand alone bets like you say spiders, and options, and proshares etc.
Thanks for taking the time to give me an answer.:idea::idea:

 

[fantastic4]

Futures can be used as indicators for individual stocks. Let's say you're trading RIIMM intraday, it's been rallying, and the nasdaq future has started sellig off. That's a good signal it's time to take profit. Either arbs will start selling short the stocks and buying the futures contract, or RIMMs been defying the market, which it won't be able to do for too long.

You can also watch the $BANK index or the $UVOL and $DVOL indices for internal divergences.

 

[Rhody Trader]

presumably someone arbs the ETF against the stocks too?

That's exactly the point I was trying to make with my last post.

 

[Grey1]

presumably someone arbs the ETF against the stocks too?

yep also negative arbing on SKF and SRS

grey1