SPI200 Chat - What will happen next?? *suspense music*

[skc]

Wow! What an angry sounding reply. Sorry for daring to speak.

LOL. You take the numerical value of SPI and compare that to the XJO. The relationship between cash and futures is very basic finance.

If you are going to use an indicator would it not be a good idea to find out what the hell it is and how it works??

Chris, and if you are going to engage in a thread with someone, it would be a good idea to find out how they normally reply! You should be gratefull that TH actually provided a response. He normally would just leave it at that.

 

[Mr J]

TH is blunt, consider it tough love or something.

 

[Chris45]

Thanks skc and Mr J. With great hesitation I’ll try engaging again and pray that I don’t end up like Monty Python’s Black Knight.

I traded the SPI for a while some years ago and I understand that futures price = cash price + cost of carry + sentiment factor (which is why the SPI usually trades at a premium to the XJO) and that futures don’t pay dividends.

I’m afraid Trembling Hand and skyQuake’s replies to my initial post were a bit short on detail for me to fully understand how dividends and capital returns/raisings explained the current SPI discount. I assumed that was the sentiment factor at play.

OK, so the Fair Value formula is F = S(1+(r-d)) where F is the current fair value of the SPI, S is the current XJO price, r is the 90 day bank bill rate and d is the XJO dividend yield. The SPI usually trades at a premium but if I suppose if r =3.2% and d=6.7% then that would explain why F<S but can someone please explain how to calculate the correct values of r and d so as to get a sensible value for F?

If the futures market were bullish I would have thought the sentiment factor might have canceled out the discount somewhat.

How do capital returns/raisings affect the calculation? Aren’t they already factored into the share prices and therefore the XJO?

 

[skyQuake]

Thanks skc and Mr J. With great hesitation I’ll try engaging again and pray that I don’t end up like Monty Python’s Black Knight.

I traded the SPI for a while some years ago and I understand that futures price = cash price + cost of carry + sentiment factor (which is why the SPI usually trades at a premium to the XJO) and that futures don’t pay dividends.

I’m afraid Trembling Hand and skyQuake’s replies to my initial post were a bit short on detail for me to fully understand how dividends and capital returns/raisings explained the current SPI discount. I assumed that was the sentiment factor at play.

OK, so the Fair Value formula is F = S(1+(r-d)) where F is the current fair value of the SPI, S is the current XJO price, r is the 90 day bank bill rate and d is the XJO dividend yield. The SPI usually trades at a premium but if I suppose if r =3.2% and d=6.7% then that would explain why F<S but can someone please explain how to calculate the correct values of r and d so as to get a sensible value for F?

If the futures market were bullish I would have thought the sentiment factor might have canceled out the discount somewhat.

How do capital returns/raisings affect the calculation? Aren’t they already factored into the share prices and therefore the XJO?

While F = S(1+(r-d)) is correct in theory, r = div yield over the entire YEAR. Craploads of companies are going ex-div before Sep SPI expires. Lots of banks and stuff going ex-div before sept. Note that most of them are yielding like 5% (cause prices got smashed so bad) so it'll make a dent on the market.
Lots of cap raisings after June have not been taken into effect as S&P rebals ever quarter. Minor effect on the index now.

35 odd point difference is a bit much but i suppose there is the 'risk' of getting into SPI now with the market thin like paper and bots screwing things up.

If you really wanna try it, Just short IG Cash Index and Long SPI.

Cheers

 

[Bobby]

Thanks skc and Mr J. With great hesitation I’ll try engaging again and pray that I don’t end up like Monty Python’s Black Knight.

Chris, are you considering index CFDs ?

Bucket shop buy/sell quotes are delayed enough for a finger touch advantage .

Don't ask me the formula please "

 

[acouch]

Thanks skc and Mr J. With great hesitation I’ll try engaging again and pray that I don’t end up like Monty Python’s Black Knight.

I traded the SPI for a while some years ago and I understand that futures price = cash price + cost of carry + sentiment factor (which is why the SPI usually trades at a premium to the XJO) and that futures don’t pay dividends.

I’m afraid Trembling Hand and skyQuake’s replies to my initial post were a bit short on detail for me to fully understand how dividends and capital returns/raisings explained the current SPI discount. I assumed that was the sentiment factor at play.

OK, so the Fair Value formula is F = S(1+(r-d)) where F is the current fair value of the SPI, S is the current XJO price, r is the 90 day bank bill rate and d is the XJO dividend yield. The SPI usually trades at a premium but if I suppose if r =3.2% and d=6.7% then that would explain why F<S but can someone please explain how to calculate the correct values of r and d so as to get a sensible value for F?

If the futures market were bullish I would have thought the sentiment factor might have canceled out the discount somewhat.

How do capital returns/raisings affect the calculation? Aren’t they already factored into the share prices and therefore the XJO?

Hi Chris,
I usally don't get involved in this stuff..

dont read to much into anything..just trade your chart..
i trade a 5 tic chart.. trade what you see..
eod you are out there to make money..name of the game..
why look for things that wont help your trading ability..
eod i am out of all trades and sleep well..tomorrow is another day..
this deep thinking does nothing to help your trading..just think of it as playing poker..
if you get a bad hand you fold..if not you play the game..simple as that
have a great weekend and take care out there
ac

ps..eveyone looks for the magic wand..there is no magic wand it depends on your ability..eod

 

[Bobby]

i trade a 5 tic chart.. trade what you see..
eod you are out there to make money..name of the game..
why look for things that wont help your trading ability..
eod i am out of all trades and sleep well..tomorrow is another day..
this deep thinking does nothing to help your trading..just think of it as playing poker..

ps..eveyone looks for the magic wand..there is no magic wand it depends on your ability..eod

Just gotta ask were you get your direction from ?
Hope its not the trend

 

[Chris45]

Thanks for your replies everyone.

skyQuake, using data for 16-July, I get F = 3995.6*(1+(0.032-0.067)*(2/12)) = 3972.
The SPI closed at 3974 so I think that now explains the discount. Problem solved.

Bobby and acouch, after developing a pretty good understanding of the “zero sum game” from playing around with individual shares, then futures, then futures options over the last 20 yrs, I’m now a long term index fund investor rather than a derivatives trader. I went to 100% cash in mid ’07 and am now looking for ideas about the future direction of the market so I can reinvest. I was thinking of buying IQs via CommSec when the time was right, as a precursor to switching funds, but haven’t played with them yet. Have you had any experience with them? Is there sufficient liquidity to make them worthwhile?

 

[skc]

Thanks for your replies everyone.

skyQuake, using data for 16-July, I get F = 3995.6*(1+(0.032-0.067)*(2/12)) = 3972.
The SPI closed at 3974 so I think that now explains the discount. Problem solved.

As Skyquake pointed out, dividends are slightly concentrated in this quarter so the div drop off for the Sept contract might be closer to 2%. This makes the calculation 3995.6 x (1 + 0.032*(2/12)-0.02) = 3937.

To use better terminology... the fair value of SPI is 3937. Given the SPI is actually 30 points or so less than XJO at 3965, it is actually trading at a premium to the fair value.

35 odd point difference is a bit much but i suppose there is the 'risk' of getting into SPI now with the market thin like paper and bots screwing things up.

If you really wanna try it, Just short IG Cash Index and Long SPI.

Based on the above you actually want to long IG cash index and short the SPI.

But I can tell you now it won't work very well. For starters the interest you pay with IG is closer to 6% so that negates about 20 points from any premium there may be. Plus a bit of spread and slip of fingers, you might be able to clear 2-3 points. Hardly worthwhile over 2 months.

Sure you can do this with 100 contracts... if your account is big enough

 

[Chris45]

As Skyquake pointed out, dividends are slightly concentrated in this quarter so the div drop off for the Sept contract might be closer to 2%.

OK, I think I’m starting to understand this now, although still a bit confused by your terminology. (Really need an arb to confirm these calculations.)
So, are you suggesting that instead of using d=6.7%pa we should use d=4.7%pa for the Sep contract calculation?

If so, then since both r and d have to be adjusted for the time to expiry, that should give:
F = 3995.6*(1+(0.032-0.047)*(2/12)) = 3986
So on 16-Jul, the sentiment factor was (SPI Close - Fair Value) = (3974-3986) = -12 ..... ie a bearish discount. Yes???

If not, what value should we use for the anticipated dividend yield (as %pa) for the Sep contract calculation?

 

[skc]

OK, I think I’m starting to understand this now, although still a bit confused by your terminology. (Really need an arb to confirm these calculations.)
So, are you suggesting that instead of using d=6.7%pa we should use d=4.7%pa for the Sep contract calculation?

If so, then since both r and d have to be adjusted for the time to expiry, that should give:
F = 3995.6*(1+(0.032-0.047)*(2/12)) = 3986
So on 16-Jul, the sentiment factor was (SPI Close - Fair Value) = (3974-3986) = -12 ..... ie a bearish discount. Yes???

If not, what value should we use for the anticipated dividend yield (as %pa) for the Sep contract calculation?

You don't need to worry about the div yield as %pa. You simply work out the total dividend drop off as a percentage of the XJO until expiry. Just pluck that number into the formula without annualising it.

F = Cash * (1+r*(time to expirary)-Total dividend drop off).

In your calculation you have used 4.7%p.a. and then multiplied by 2/12 which is too small a number.

If you really want an exact answer, you need to work it bottom-up. Just take the top 20 companies, look at the ex-div date and amount, and calculate how many points it translate to compared to the current share price.

E.g. (numbers not real)

Total market cap of XJO ~ $900B
BHP market cap ~$120B
BHP ex-div 15 Aug (so within SPI expiry)
BHP current price $30
BHP next div expects to be ~$0.5 ($0.5/$30 = 1.67%)
BHP's impact on SPI = 1.67% * ($120B / $900B) = 0.13%
Expressed in points = 4000 (XJO price now) x 0.13% = 5.3 points

Do that to top 20, and scale up a bit and you would be pretty close. PM me the answer if you did do it

 

[Chris45]

Thanks. I'll give it a go.

 

[skyQuake]

Thanks. I'll give it a go.

No dont! Trust me on that. Spent many hours, got inconclusive answer.
Not all companies in the ASX 200 have 100% weighting. For example, RIO is weighted at 90% according to S&P.
IWF (investable weight factor) for most companies are 100%, but can be quite low for some others.
And with BHP, RIO; its dual listed, so you gotta be sure you get the AUS market cap figure... Can of worms imo.

Hedging is problematic, as SKC said, the interest charged is quite high on IG cash contracts.

 

[skc]

No dont! Trust me on that. Spent many hours, got inconclusive answer.
Not all companies in the ASX 200 have 100% weighting. For example, RIO is weighted at 90% according to S&P.
IWF (investable weight factor) for most companies are 100%, but can be quite low for some others.
And with BHP, RIO; its dual listed, so you gotta be sure you get the AUS market cap figure... Can of worms imo.

Hedging is problematic, as SKC said, the interest charged is quite high on IG cash contracts.

I did it for the Mar and Jun contracts for all top 200 companies (for several different purposes). It worked reasonably well - but your answer probably has a margin of +/- 2 to 5 points. This means you can only pick out substantial discount / premium when it happens.

BTW, to make the numbers useful you will also need to do it on a daily basis. As the div drop off and the interest remaining changes everyday. So the fair value of SPI may be 30 points less than XJO today, but 27 points less than XJO next week, after NAB goes ex-div for example.

 

[Chris45]

No dont! Trust me on that. Spent many hours, got inconclusive answer.

Aaahh! OK, I've already spent a few hours searching for and playing around with data and thinking about how I was going approach it so, given the uncertainty, I might just take your advice here, thanks. Now I've got the Fair Value formula figured out, maybe an occasional look at it will suffice for my purposes.

BTW, to make the numbers useful you will also need to do it on a daily basis.

Sounds like a lot of work. Thanks anyway and I do appreciate the time you've taken to help me out with this.

However, I didn't get an answer to my question about the ASX IQs, so maybe no one here has used them.

 

[Sunder]

I was thinking of buying IQs via CommSec when the time was right, as a precursor to switching funds, but haven’t played with them yet. Have you had any experience with them? Is there sufficient liquidity to make them worthwhile?

IQ is provided by the ASX, and has a very thin spread. It is marked very closely to the real value of the XJO, (except of course, during pre-open etc).

There are always bids and offers within 5 points of XJO, but I'm not sure what happens if someone depletes one side too heavily. (Usually around 20-50 contracts within 5 points, then more at greater spreads. I always thought they were "real" bids and offers as opposed to those put there by the ASX to create liquidity)

I use them, and while I have been smashed around a bit lately, it's not due to the vehicle... More like a poor driver

 

[ivant]

This thread discussion is becoming indicative of the actual underlying market. This is what a bull market feels like 24/7

 

[nomore4s]

This is what a bull market feels like 24/7

I didn't realise we were in a bullmarket.

 

[ivant]

I didn't realise we were in a bullmarket.

Lol I don't think we are. Some people think it is. But this is what a bull market does. Volatility dries up..

 

[Real1ty]

Lol I don't think we are. Some people think it is. But this is what a bull market does. Volatility dries up..

And Bull Markets "climb a wall of worry".

Look at all the threads and there are calls everywhere for the next leg down and there has been for months.

I suppose at least the end of the world posts have dried up but still plenty of worry out there.

One thing i find interesting is many who think we can continue to go higher, of which i am one, at least realise the possibility of a descent retracement yet a lot of the bears can only see one direction.