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Strategies & Market Trends : Tech Stock Options
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To: Tom Trader who wrote (30462)12/5/1997 12:21:00 PM
From: Esteban  Read Replies (1) of 58727
 
Tom,

Would you mind answering a lingering question I've had about futures
trading that will no doubt underline my ignorance of the subject?

It has to do with the fair value concept. I already understand that
fair value is based on the interest that would be paid on margin till
the expiration date, etc. and that on the contract expiration date
the futures contract is valued the same as cash. The practical effect
of this seems to me to be different depending on whether your
position is long or short, and this is where I get confused.

Consider a hypothetical example where I buy one contract and at the
same time sell one contract of spz on the date that it becomes the
near contract, with the intention of holding both of them to
expiration, at which time I convert to cash. Say the fill price is
at fair value of 10. Now assume that the market is in a trading
range for the entire time and by some wierd coincidence when the
contract expires, the underlying cash market is at the exact same
level as the day I bought and sold the 2 contracts, or 10 points
below the original fill price at the now fair value spread of 0.

It appears to me that I have lost 10 points on the long position, and
gained 10 points on the short position for a net of zero. It seems to
me that this scenario favors the short postion in a flat market. This
is the point I don't understand, because it would be too easy to go
short futures and long cash on every contract and pocket the
difference on expiration. Maybe there's not enough difference to make the venture worthwhile, but from an academic point of view it would seem there is a bearish bias to the futures market.

Am I thinking correctly on this subject?

Esteban
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