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Strategies & Market Trends : Bonds, Currencies, Commodities and Index Futures -- Ignore unavailable to you. Want to Upgrade?

To: Nelson958 who wrote (2550)	2/6/2003 9:36:46 AM
From: Chip McVickar	Respond to of 12411

Nelson, Perhaps others who are experts will add some commentary. Here's my amateurs look. The futures contact is tied to the cash market. "The spread or premium changes throughout the day because, the futures contract and the actual S&P 500 trade independently of each other." Premium is the spread difference between what the futures market is willing to pay for the cash market. You'll see negative premium when no one is willing to purchase the futures. Quote: "Fair value" refers to the "proper" relationship between the futures and the cash. Through a complex formula using current short term interest rates and the amount of time left until the futures contract expires, one can determine what the spread between the futures and the cash "should" be." It's all based on supply and demand. The next important requirement is liquidity, as the contract moves throughout it's life. The front month retains the most liquidity and about 2 weeks ± before expiration the focus begins to move to the next contract, and you can see volume change. IMO "Fair Value" is not particularly important to traders of trend or momentum as they are playing the movement not the spread...., as in the E-mini. But to those who are hedging or using arbitrage the "Fair Value" is very important. Time erosion of a futures contract is of importance to certain types of traders. Also, you might have some confusion on an "Options Premium" or its intrinsic value with the cash/futures premium. In your gold example, one would by a forward contract if you were a position player, close to the end of the front contract, not willing to pay the commissions to role forward and expect to benefit from that purchase. There are probably a bunch of other reasons. Please take the time to understand every facet of the underlying contract you intend to trade (and all the risks) before plunging in....! Precious metals are a difficult market, susceptible to a number of conflicting tangents of forces. Here's an article that will answer more questions. allstocks.com

To: Nelson958 who wrote (2550)	2/6/2003 10:24:50 AM
From: Louis V. Lambrecht	Read Replies (1) \| Respond to of 12411

Nelson - IMHO, you are correct and at the same time not correct bying further month on the gold. Volume is pretty good, and relative liquidity is there, even for Dec contracts. I observed that the gold futes move in parallel, at least the moves are too small for me to trade on. Essentially, no advantage to buy a specific month instead of another, even cash. You don't buy the futures, remember, you only have to maintain a margin of $1000 for each contract of 100 oz. gold. At the end of the day, your position is marked to market for the unrealized profit and loss between your buying price and the settlement. The difference matters, not the price. However, your rationale is correct in conjunction with futes options. Use further months in combination plays, futures spreads, or futes options synyhetics and other exotic plays. For my part, I only buy options on the metals (risk is well defined by the premium). And ideed, for options, I look at the Dec 2003 contracts. Chip directed you to the fair-value concept. A difference tho, less meaningfull as time passes, is the dividend yield used in the calculation. On gold futes, you would use the "forward rate", which is Gold Forward Rate - less LIBOR ( lbma.org.uk ) Index futes or other commodities as the energy have seasonals priced in the further months. What applies to the gold futes is not the same as for other commodities. Hope my fuzzy logic helps a bit <ng>.

To: Nelson958 who wrote (2550)	2/6/2003 10:54:37 AM
From: OX	Read Replies (1) \| Respond to of 12411

it really depends on what you're trying to do. farther month and near month futures contracts do not necessarily (re)act the same. there are popular strategies that involve spreading near vs far month contracts (known as terms such as backwardation and contagno). as for gold (something I am not familiar with), in addition to the traditional futures calculation involving dividend and time to expiration, there are things like lease rates, i believe, that fall into the calculation of the futures contract. quite complex and not as simple as buying a farther month contract to take advantage of a later expiration cycle. better go read a good book or two.