38 lines
2.8 KiB
Plaintext
38 lines
2.8 KiB
Plaintext
558 Part V: Index Options and Futures
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That is, he would buy back the ones he is short and sell the next series of futures. For
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S&P 500 futures, this would mean rolling out 3 months, since that index has futures
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that expire every 3 months. For the XMI futures and OEX index options, there are
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monthly expirations, so one would only have to roll out 1 month if so desired.
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It is a simple matter to determine if the roll is feasible: Simply compare the fair
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value of the spread between the two futures in question. If the current market is
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greater than the theoretical value of the spread, then a roll makes sense if one is long
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stocks and short futures. If an arbitrageur had initially established his arbitrage when
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futures were underpriced, he would be short stocks and long futures. In that case he
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would look to roll forward to another month if the current market were less than the
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theoretical value of the spread.
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Example: With the S&P 500 Index at 416.50, the hedger is short the March future
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that is trading at 417.50. The June future is trading at 421.50. Thus, there is a 4-point
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spread between the March and June futures contracts.
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Assume that the fair value formula shows that the fair value premium for the
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March series is 35 cents and for the June series is 3.25. Thus, the fair value of the
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spread is 2.90, the difference in the fair values.
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Consequently, with the current market making the spread available at 4.00, one
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should consider buying back his March futures and selling the June futures. The
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rolling forward action may be accomplished via a spread order in the futures, much
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like a spread order in options. This roll would leave the hedge established for anoth
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er 3 months at an overpriced level.
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Another way to close the position is to hold it to expiration and then sell out the
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stocks as the cash-based index products expire. If one were to sell his entire stock
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holding at the time the futures expire, he would be getting out of his hedge at exact
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ly parity. That is, he sells his stocks at exactly the last sale of the index, and the futures
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expire, being marked also to the last sale of the index.
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For settlement purposes of index futures and options, the S&P 500 Index and
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many other indices calculate the "last sale" from the opening prices of each stock on
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the last day of trading. For some other indices, the last sale uses the closing price of
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each stock.
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Example: In a normal situation, if the S&P 500 index is trading at 415, say, then that
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represents the index based on last sales of the stocks in the index. If one were to
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attempt to buy all the stocks at their current offering price, however, he would prob
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ably be paying approximately another 50 cents, or 415.50, for his market basket.
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Similarly, if he were to sell all the stocks at the current bid price, then he would sell
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the market basket at the equivalent of approximately 414.50. |