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Troy,
Here is an article on Program Buying and Fair Value it
was written by Kevin Haggerty former Head of Trading
at Fidelity Capital Management. You can find some
more of his stuff at tradingmarkets.com
JS
Program Trading And Fair Value
By Kevin Haggerty
Editor's note: Click here to read the Chicago
Mercantile Exchange's (CME)short article on
calculating fair value.)
As an intraday trader, your primary concern is not
fair value, but the actual levels at which real buy
and sell programs will kick in. If the spread widens
to the buy program level listed in the "Views From The
Trading Desk" commentary, it means program traders
will be selling futures and buying stocks.
If the spread narrows to our sell program level,
program traders will buy futures and sell stocks. This
is a standard arbitrage to enhance the return of
holding the S&P 500.
There are variations that impact the specifics of
program trading, but your primary concern is to know
when program trading will affect your day trading.
This is the formula for fair value:
Fair Value (FV) = S{1 + ( I - D )}
Where
S is the S&P 500 index;
I is the amount of interest paid to the broker to
borrow the money to buy all of the stocks in the S&P
500 index;
D is the amount of dividends paid to you from all of
the companies you own in the S&P 500 index.
The interest is calculated on a percentage lending
rate from today until the date the S&P futures
contract expires. The dividend income also is
expressed as a
percentage rate.
The short version of the fair value formula is the
value of the S&P 500, plus the interest to buy the
stocks, minus all of the dividends you get.
Actual premiums used for real-world program trading
must include the cost of money(which can vary with
different firms), execution slippage and any NYSE
trading curbs(buy minus, sell plus), and commissions.
CNBC does not calculate any of the real cost that
determines the dollar premium you use, which even
varies amongst program traders because of different
costs.
--- wallst <wallst@xxxxxxxx> wrote:
> Do any of you out there know of an easy way to
> calculate fair value for the S&P. From the
> information that is out there what I have seen so
> far is not very clear. I am confused as to which
> rates are actually used also the actual way it which
> its calculated. I have seen a number of examples
> all of which I have not been able to make heads or
> tails from.
>
> Also is there any sources for the calculating of buy
> and sell programs using the preium at which the S&P
> is trading? Thanks again
>
> Troy
> wallst@xxxxxxxx
>
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