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Is the cash market the same as the SPX? My understanding is that the numbers on the SPX are about 5 points higher than those on the ES. Is this correct'?
The "cash market" is the same as the SPX inasmuch as the SPX represents the index for the S&P500. You can't actually buy the SPX because it's an index. The SPX will usually trade a few points above the ES because of a concept called "cost of carry." This, in simple terms, is what it would cost you to borrow the money to buy the same value in the stocks underlying the SPX to give you the same return as holding the future (i.e. the ES). The difference in points between the ES and the SPX will be greatest when a new contract is launch (i.e. when the contract is furtherest from expiration) and each day the difference will reduce in a linear fashion to the expiration date when the difference will become zero. This linear change in difference assumes that interest rates (which determine the cost of carry) do not change during this period.
$SPX is considered the cash basis (spot market) of the S&P 500 Index.

ES as a futures contract is derived from it's spot market ($SPX).

The difference between the futures market price (ES) and the cash basis ($SPX) is called the premium ($PREM). If you watch the $PREM in real-time during the regular trading hours you will see it jump around throughout the session.

Fair Value is the theoretical price of the futures contract based on the formula day trading mentioned (minus dividends paid in the calculation). At Fair Value, the futures market (ES) is considered fairly priced to the spot market ($SPX). As $PREM drifts around during the day, pricing of the futures contract is in effect drifing away from and returning back to theoretical fair value. The expansion phases away from fair value are met with arbitrage related buying and selling designed to exploit the temporary imbalance between the cash market and the futures contract.
I think that $PREM measures the difference between SP and $SPX and $EPREM measures the difference between the ES and $SPX.

pt_emini: From a practical point of view, when traders arbitrage the ES/SP against the $SPX do they do it against a representative basket of stocks or do they use something like the SPY? If they use the underlying stocks then it is my guess that they don't transact in all 500 but a subset that proxies the S&P500.
In general the futures price tends to move first, creating price inefficiencies in the cash market which the arb programs try to exploit. In a classic arb, the goal is to capture the premium with no risk, a theoretical risk free trade. In a very simple example, when the futures price moves to a discount to the cash market (futures drops a predetermined distance below fair value), arb programs trigger buying the futures contract and simultaneously selling the cash market. The programs will subsequently close both positions when the markets return to neutral at fair value.

There are some very successful scalping strategies that are derived from this basic understanding of how the $PREM affects short term buying and selling in the futures market. Scalping is differentiated from arbitrage in this situation in that premium scalping is directional trading and not hedged.

Since the S&P500 index is capitalization weighted, arb programs can focus on those stocks comprising the top 10% of the index and achieve a good fit to the entire index on the short term. ETF's like the SPY do make it a lot more cost efficient to arb the two markets, rather than buying or selling a basket of individual stocks on the NYSE. SPY pricing is very efficient however, making the time window for an effective ES/SPY arb very tight. While on the subject, ETF's are a nice tool for hedging longer term intra-day trend trades as well as swing trades which are held for several days.
Thanks for the explanation!
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