Interpreting futures fair value in the premarket

 


When the spread is at fair value, where it "should" be, there is no theoretical advantage to owning the futures instead of the cash, or vice versa. While futures indicate where the market will go over the next few sessions, fair value is the futures rate before market opening adjusted for purchasing shares at the opening. Futures represent the opinions of all the investors who invest in them about the level of the market when the futures expire. Futures are traded on the Chicago Mercantile Exchange and predict what level the market will have on the futures expiry dates in March, June, September and December.

Fair Value


Bert Markgraf is a freelance writer with a strong science and engineering background. He started writing technical papers while working as an engineer in the s. More recently, after starting his own business in IT, he helped organize an online community for which he wrote and edited articles as managing editor, business and economics.

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These returns cover a period from and were examined and attested by Baker Tilly, an independent accounting firm. Visit performance for information about the performance numbers displayed above.

Skip to main content. What Is the Dow Futures? Fair Value While futures indicate where the market will go over the next few sessions, fair value is the futures rate before market opening adjusted for purchasing shares at the opening. Adjustments To determine the fair value of the stock market for investors wanting to purchase shares, the value of the futures has to be adjusted because the investor who purchases futures is not in the same position as one who buys shares.

But, in the "after-hours" futures session, the futures are up another 4. So, you would hear us say something like, "The futures, at plus 4, are right at fair value, and they will therefore not be a factor at the open. But, suppose in this example, the futures were up only 2 points. But, the reality would be this:. Since fair value is at 6. In this case, you would hear us say something like "Even with the futures up 2, they are well below fair value and are a negative for the opening. We need to get to plus 4 in order to be at fair value.

Also note that it is possible for a declining futures price to still be a positive. If the futures and cash closed far enough apart, say by 8 points, then a 1 point decline in the futures would still leave a spread of 7 points, which, in our example, would be enough to trigger buy programs at the open.

In the morning, the effect is gone within the first few minutes of trading. Its primary value for the average investor is probably in the area of "market on open" orders. People who instruct their brokers to buy or sell when the market opens should be aware of how the open is likely to go. Its secondary value is peace of mind. Knowing that program trading is likely at the open, investors are less likely to become overly concerned if the market drops sharply in the first few minutes. Second, the spread itself can change very quickly in the "after-hours" and "pre-opening" session.

There are not a lot of traders working, and the contract can make big moves in a flash. Third, professionals and institutions are watching the futures like a hawk, and reacting instantaneously.

By the time we have finished our explanation of what the futures are indicating, the big money has already reacted. They are WAY ahead of the average investor.

The value of this information is that it tells you what to expect the big money to do. But it rarely gives you a head start because the institutions have the computer power that figures out all the possibilities and spits out buy and sell orders in less than the blink of an eye. So, it should be treated merely as another piece of the puzzle, information that lets you know WHY things are happening, not necessarily information that puts you on an even footing with the big guys. Fourth, sell programs sell stocks, buy futures require less margin less borrowed money.

So, there is a natural bias toward having more sell programs than buy programs. Fifth, as each quarter progresses remember, the futures contracts expire each quarter the fair value declines, increasing the likelihood that the spread will hit the buy or sell level.

Sixth, despite points 4 and 5 above, which show the table titled in favor of sell programs, the Dow Industrials are up thouands of points since program trading came into existence. This proves, to me at least, that while the programs are something we should all be aware of, they have NO measurable long-term impact on stocks.

They blow through the market and sometimes create quite a fuss, perhaps panicking some into selling out, but days, and sometimes only hours, later, prices are right back where they started. You can paste EPS as it is, for revenue you should estimate or calculate the percentage of revenue growth through the last years. As you find stocks with higher Fair Value than their actual stock market price, investing in those would be the right idea.

The Fair Value Calculator uses two different financial ratios. With the combination of both ratios a true intrinsic value can be calculated. Follow these instructions to learn how to calculate the true value of a stock. To use the Fair value calculator two financial ratios are necessary.

On the one hand the EPS Earning per share on the other hand the revenue growth. In every annual report Key statistics and financial data are listed. If you want to calculate many stocks on their intrinsic value, you should use a stock screener or a financial website that provides these informations very easily.

One of the best websites for financial ratios and information to stocks is google invest. With the use of the search box on the top end of google invest, stock information can be found very quick.

In the example of Apple this ratio should be 9,