Q&A

---

Since You Asked

Confused about some aspect of trading? Professionaltrader Don Bright of Bright Trading (www.stocktrading.com), an equity tradingcorporation, answers a few of your questions.

Don Bright of Bright Trading

---

ABOUT THE PREMIUM INDEX

I am from Argentina and I work in a proprietary firm. I have somequestions about the premium index. First, is the premium Standard &Poor's 500 futures - S&P 500 cash index or is S&P 500 futures- S&P 500 cash index + FV spread? I understand that the premiumis S&P 500 futures - S&P 500 cash but in the web of my broker,you see that premium is S&P 500 futures - S&P 500 cash index+ FV spread. Which is correct? Second, do you use only premium when breakingprogram levels?--Sheik

Both your definitions are correct. Certain data vendors use the Premsymbol for the difference between the spot price of the S&P 500 indexand the S&P futures. Our traders consider fair value in our Prem equation.We take the spot price + estimated fair value (which is basically a costof carry calculation based on interest rates and time until expirationof the futures contract), plus or minus the futures price).

And here's something from H.L. Camp's website, www.programtrading.com:"FV is nothing more than the value of S&P 500, plus the interest Ipay my broker to buy all of the stocks in it, minus all of the dividendchecks I get from those stocks."

And here's another definition:

FV = S [1 + (I - D)]

"S" is the S&P 500.  The ticker symbol is Spx and/or Inxon most good datafeeds <www.programtrading.com/datafeeds.htm>. "I" isthe amount of interest paid to your banker or broker to borrow the moneyto buy all of the stocks in the S&P 500. The interest is calculatedbased on a percentage lending rate (R) from the current date (today) untilthe date that the S&P futures contract expires in March, June, September,or December.

"D" is the amount of dividends paid from the companies that you ownin the S&P 500 that pay a dividend. The dividends are paid to you basedon the record dates for any stock in the index that is announced betweenthe current date (today) and until the date that the S&P futures contractexpires in March, June, September, or December. This dividend income isexpressed as a percentage rate too.

The latter (premium or discount adjusted calculation using FV) is usefulin determining the estimated opening range of the overall market priorto each day's opening bell. We use that up/down percentage for the pricingof our opening-only orders on the Nyse stocks each morning. If the futuresindicate that the overall market will be opening up 1%, then we make anassumption that each of our stocks should open up 1% and place our bidsand offers around that price. If the stock opens further up, or furtherdown than our bid/offer, we feel comfortable in knowing that we are participatingin the opening gap on the same side as the Nyse specialist. This openingplay has been detailed here in Technical Analysis of STOCKS &COMMODITIES.

We also use the Prem/Disc (discount) of the futures to the adjustedspot + FV number to help with our intraday entry/exit determinations. Ifwe see a large premium, then we know that the futures traders, who areselling the futures, will likely be buying the underlying securities tohedge themselves, basically buying at parity and selling futures aboveparity. This gives us time to anticipate intraday market swings.

HERE'S THE FUTURE

My question is in regards to the S&P futures movement from 4 pmto 4:15 pm. This period is after the regular market closes, so what isthe futures movement based on? Is it market on close orders getting finishedand after market company results announcements, or is it other factors-- can you explain this?

Is it better to set an emini futures chart to the time frame of theregular stock market hours of 9:30 am to 4 pm or until 4:15 pm, when thefutures pit closes? I ask because when measuring the size of the gap betweenthe close and the morning, is it better to disseminate after market activityor keep it set to market hours for a true reflection?

You also referred to the preopen in how brokers hedge themselves inthe morning when they get sent buy orders in from institutions, so theybuy the eminis to hedge themselves against the upcoming buy orders of stock.--Raker

We use the 9:30 am to 4 pm for the actual trading day of the futuresfor analysis purposes, and keep trading after 4 pm if we see an opportunityto profit and/or close positions. Some trading starts again at 4:30 pm(Globex), but most traders don't trade overnight. I use the Chicago MercantileExchange "open, high, low, close" numbers for determining the next day'spivot points and other analysis.

And yes, this time frame allows for hedging the market on close equityorders that get filled a couple of minutes after the markets close at 4pm. This also allows for trading based on news/earnings and so forth thatare announced right after the 4 pm bell and gives traders a bit of timeto flatten out daytrades.

Regarding the preopening: Some brokers who have large orders to buystocks on the opening tend to buy futures in the premarket (not hedge)with the feeling that with all those buy orders, the market will likelygap up so they can make a profit on the futures to augment their profitfrom supplying stocks. Hope this helps.

---

E-mail your questions for Bright to Editor@Traders.com, with the subject line direct to "Don Bright Question."

Originally published in the July 2007 issue of Technical Analysisof STOCKS & COMMODITIES magazine. All rights reserved. © Copyright2007, Technical Analysis, Inc.

---

Return to July 2007 Contents

---