Feb

23

Why is the close price so much higher than trading at the close? Why is June ES 38 points higher than March ES? That's a really big spread. It must mean something. And to adjust the back data to continuous must remove or affect information.

Justin Klosek responds:

March-June ES spread is due to the difference between the (assumed) dividend rate of the S+P and the risk free rate.

Investor A who owns the portfolio of S&P 500 stocks receives the dividends and the return from the changing stock prices. Investor B who owns the futures and a Treasury bill has (to first order) the same portfolio. He does not receive the stock dividend but instead earns the T-bill rate, which is now higher than the dividend yield. So the futures prices have to adjust to account for this.

If the risk free rate is 4.75% vs a dividend rate of 1.25%, that 3.50% difference is reflected in the futures roll—about 87bp per quarter, or around 38 points, plus/minus.

Kora Reddy adds:

Fisher effect as chair says here:

The Performance of Market Index Futures Contracts

Zubin Al Genubi comments:

Seems it would behoove one to own bonds with the futures to capture the roll. Especially now.

Justin Klosek asks:

Long T-bills plus S&P futures is no different than owning cash stocks…. what drives your “especially now” comment?

Zubin Al Genubi responds:

If FOMC is done at 5 1/4, in 2 increments 3 months apart we are 6 months away from the end of rate increases. Powell's bond "put" so to speak. Yields are high. Seems, like today [22 Feb], the bonds have decoupled from stocks. Why not carry some bonds to support a portfolio of futures? Carry margin is much less with futures than stocks. The overnight market is a big plus of futures over stocks.


Comments

Name

Email

Website

Speak your mind

Archives

Resources & Links

Search