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Index Arbitrage Program Trading Premium Values
for Apr-23-2014
Updated: Tuesday, Apr-22-2014
9:30pm ET

  Sell Programs No Programs Buy Programs
Index Sell
Active (SA)
Sell
Threshold (ST)
Fair Value
(Premium) (FV)
Buy
Threshold (BT)
Buy
Active (BA)
S&P
500
(TM)
-10.45       -8.69       -6.33       -3.91       -2.11      
NASDAQ
100
(SM)
-30.49       -21.40       -9.08       3.73       13.18      
Dow Jones
Ind. Avg.
(SM)
-158.22       -120.19       -68.84       -23.19       10.61      

What do these terms and numbers mean?


Probability of Program Trading vs. Premium
(Premium   =   JUN 2014 Futures - Spot Index)

S&P 500 (TM) NASDAQ 100 (SM) Dow Jones Industrial Average (SM)
SP 500 Program Trade Probability NASDAQ 100 Program Trade Probability DJIA Program Trade Probability


 

Our Trading Guidelines for Apr-23-2014
When the following Premium Extremes occur: Our Trading Possibilities Will Include:
S&P 500 Prem greater than -3.80
Buy Spyders (symbol SPY).
On continuations (after a buy program), buy E-mini or regular S&P 500 futures.
Buy Diamonds (symbol DIA).
Execute a S&P 500 buy program.
S&P 500 Prem less than -8.80
Short Spyders (symbol SPY).
On continuations (after a sell program), sell E-mini or regular S&P 500 futures.
Short Diamonds (symbol DIA).
Execute a S&P 500 sell program.
NASDAQ 100 Prem greater than 4.30
Buy NASDAQ 100 ETFs, the Cubes (symbol QQQQ).
On continuations (after a buy program), buy E-mini or regular NASDAQ 100 futures.
Execute a NASDAQ 100 buy program.
NASDAQ 100 Prem less than -21.95
Short NASDAQ 100 ETFs, the Cubes (symbol QQQQ).
On continuations (after a sell program), sell E-mini or regular NASDAQ 100 futures.
Execute a NASDAQ 100 sell program.






 
What do these terms and numbers mean?
What are Fair Value, Sell Active, Sell Threshold, Buy Threshold, and Buy Active?
When do sell programs and buy programs occur?
These terms indicate when index arbitrage program trading activity could occur and, hence, could produce sudden and possibly sharp market movements. Foreknowledge of the likelihood of an adverse program trade can help investors determine the wisdom of initiating long or short positions in stocks, index futures, Exchange Traded Funds (ETFs), and options.

Buy programs occur when the futures market is over-valued relative to the stock market and consists of the index futures being sold and the stocks in the index being bought. Sell programs, the opposite case, occur when the futures market is under-valued relative to the stock market and consists of the index futures being bought and the stocks in the index being sold. Over-valued and under-valued conditions arise because trading in the futures and equities markets occurs independently. The key to determining these over or under-valued conditions is the arithmetic difference between the futures and the spot index (which is known as the premium).

The five terms of fair value, sell active, sell threshold, buy threshold, and buy active refer to specific values of the arithmetic difference of an index futures contract price minus its spot (or current) price. For example, if the S&P 500 futures contract price is 1409 and the S&P 500 spot index is 1400, the difference is 9; whether this particular difference has bearish or bullish implications depends on whether it falls in the range of sell programs, no programs, or buy programs. This difference between the futures contract price and the spot index is known by the various names of premium, spread, and basis; the nomenclature adopted here will be premium (or prem). This usage concurs with the CNBC ticker. As described previously, other data feeds use the symbol of $PREM.X, $PREM, or SP-PREM for the S&P 500 premium and ND-PREM for the NASDAQ 100 premium. The five significant values of the futures-spot premium that delineate the program buying and selling ranges are described below:
Sell Programs
A sell program is the simultaneous (short) sell of all (or almost all) the stocks in the index (in weighted proportions) and the purchase of the index futures contract. Therefore, the stocks comprising the index should decline and, correspondingly, the index futures should rise, producing the effect of a stock market decline and futures market rise. Two significant values in the sell program range are the sell active and the sell threshold values, described below:
No Programs
Buy Programs
A buy program is the simultaneous purchase of all (or almost all) the stocks in the index (in weighted proportions) and the sale of the index futures contract. Therefore, the stocks comprising the index should rise and, correspondingly, the index futures should decline, producing the effect of a stock market rise and futures market decline. Two significant values in the buy program range are the buy threshold and the buy active values, described below:
Sell
Active (SA)
Sell
Threshold (ST)
Fair Value
(Premium) (FV)
Buy
Threshold (BT)
Buy
Active (BA)
This is the "futures - spot" index premium value at which sell programs should be prevalent, producing a meaningful decline in the stock market.

In the graphs above, the sell active value occurs on the left side where the probability of a sell program approaches 100%.
This is the minimal "futures - spot" index premium value at which sell programs might be initiated. Sell programs are possible and could cause a stock market decline.

In the graphs above, the sell threshold value occurs on the left side where the probability of a sell program is just greater than zero.
This is the "futures - spot" index premium value at which the futures and the equity markets are in equilibrium. No (profitable) index arbitrage type programs will occur at fair value nor when the "futures - spot" premium level falls within the range extending from the sell threshold to the buy threshold.

This range occurs in the middle portion of the above graphs where the probability of any program activity is equal to zero and, hence, falls on the horizontal axis.

An equation for "fair value" is presented in the Help Pages.
This is the minimal "futures - spot" index premium value at which buy programs might be initiated. Buy programs are possible and could cause a stock market rise.

In the graphs above, the buy threshold value occurs on the right side where the probability of a buy program is just greater than zero.
This is the "futures - spot" index premium value at which buy programs should be prevalent, producing a meaningful rise in the stock market.

In the graphs above, the buy active value occurs on the right side where the probability of a buy program approaches 100%.

 Further Descriptions

 
Acknowledgements
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