The media also talks about Fair Value constantly and the “premium” or “spread” and certain execution levels. What are they talking about?
The “premium” (PREM) or “spread” is the difference between the most active S&P 500 Stock Index Futures Contract (the spoos) minus the actual S&P 500 Stock Index (cash). That difference, which usually ranges between $5.00 to $-5.00, and slowly decays or rises as we reach the S&P 500 Futures Contract expiration, is what program trading is based on. When the PREM difference rises to a certain execution level, “buy” programs kick in. Our large institutional clients then buy the stocks in the S&P 500 Stock Index on the New York Stock Exchange and sell the S&P 500 Stock Index Futures Contract against those positions on the Chicago Mercantile Exchange. When the PREM difference drops to a certain execution level, “sell” programs kick in and our clients do the exact opposite. These transactions have extremely low risks because of the abnormal market differences in the PREM as traders capture those few points of profit before the PREM returns to normal and/or Fair Value. This type of program tra
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