Demo of Institutional Services. Purpose of This Web Site. How Knowledge of Index Arbitrage Can Assist Investment Timing. How Index Arbitrage Program Trading Can Affect Various Types of Investments. Description of the Pages at this Web Site. Exchange Traded Funds ETFssuch as SPDR SpidersQQQQ Cubesor DIA Diamonds. How Index Arbitrage Program Trading and Any Induced Continuing Momentum Can Affect Various Types of Investments An index arbitrage buy program is the simultaneous buy of the stocks in the index and the sale of the index futures.

Thus, a buy program exerts an upward influence on stock prices and a downward influence on futures prices. Conversely, a sell program is the simultaneous short sell of the stocks in the index and the buy of the index futures, producing a downward influence on stock prices and an upward influence on futures prices.

This influence on equity and futures price that is directly attributable to index arbitrage program trades is summarized in the table below under the column labeled "Program Trade Effect".

A large index arbitrage program or several programs executed in quick succession can frequently induce a continuing market momentum of conventional trading. This effect of program trading to be the catalyst that perpetuates equity buying or selling can result from the occurrence of meaningful technical events, such as the penetration of resistance or support levels, trend lines, moving averages, Bollinger Bands, etc.

The audience of market technicians who are alert to these market movements has been swelled in recent years by day traders and boutique hedge funds. This induced influence is summarized in the table below under the column labeled "Continuation Effect".

Dividend Arbitrage Explained | Online Option Trading Guide

These two factors explain why the index futures price can increase after a buy program: Sell short stock or ETF Write naked call option Buy put option. Buy index future full or mini. Sell index future full or mini. The "-" sign indicates a negative undesirable influence for trade profitability, with prices decreasing for long trades and increasing for short trades.

This page also provides a basic description of index arbitrage. Demonstrates how the fair value, buy, and sell premiums decay over time, from now until the futures contract's expiration. These tables and graphs change daily because they are based on data that change daily, namely, the closing value of the index, interest rates applicable to the futures contract's time period, the time to expiration, and dividend forecasts, which can change as a result of corporate announcements.

Compares and ranks the absolute and relative performance of each stock in the indexes covered. The relative performance compares the stock's performance to that of the index. These rankings are useful for selecting subsets or baskets of stocks for partial hedging.

For example, stocks expected to outperform the index could be bought and the index future could be sold; conversely, under-performing stocks could be sold and the index future could be bought.

Each stock's percentage weight in the index is shown to help in constructing hedge ratios. A stock that is eliminated from the index which is not the result of some corporate activity such as an acquisition or bankruptcy can undergo a sharp drop.

Put/Call Parity

Often, stocks that are eliminated have relatively low capitalizations and low seasonal stock market swings prices. Investors can easily identify these stocks by scanning the entries at the bottom of the table. These weights can be used to construct hedge ratios.

The rankings can be sorted either alphabetically or by percentage weight in the index. The latter ranking also shows the cum percentages. A pure capitalization index is constructed by dividing the cross-products of the total, actual number of shares outstanding for each company and its respective stock price by the index divisor. A modified capitalization index is based on something other than the total, actual number of shares outstanding. A transition phase from March 18, to September 16, will be based on half of the floating shares plus half of the total outstanding shares.

Further, any new additions to the index since March 18,have been added on the "full floating" basis. The Dow Jones Industrial Average are options traded after hours a price weighted index: Each stock's weight in the Dow Jones Industrial Average index is its price divided by the sum of the prices of all stocks in the index.

Provides estimates for dividends, in the following contexts: Aggregate dividend amounts and divisor adjusted dividends for each futures contract. Dividend amount estimated for the next year and yield for each stock, by index. Decomposes each index future into its two components: Provides the interest rates to be used for calculating the index arbitrage values for all active index futures.

The curve consists of linear line segments between zero coupon yields how much money do a phlebotomist make in oregon from actively quoted deposit rates and traded Eurodollar futures.

There is good price i. Nevertheless, it probably represents a good mid-point case.

To use this curve or associated tableselect the yield that corresponds to the applicable date such as the expiration date of a futures contract or, equivalently, the number of days from now until expiration.

Provides a calculator that black scholes european option calculator investor can use to: Calculate new index arbitrage values between updates of this web site, particularly during periods of extreme market volatility.

Fair value is the price of the futures contract when it is correctly priced relative to the underlying index. At fair value, there is no positive or negative bias that the two markets mutually exert on each other.

Fair value premium is the difference between the fair value futures contract price and the underlying index. Continuing the above example, fair value premium would be equal to So what's the problem? The problem is that colloquially the term "fair value premium" is contracted to just "fair value". This replacement stocks for sks rifle be observed in the financial press, both printed and television.

So, for the above example, fair value is often stated as just 3. Since this contracted form is more commonly used, fair value premium will hereafter be called just fair value and the equation will reflect this interpretation, namely the difference between futures and index values and not just the futures value. The interest, or cost of carry, component is based on interest rates determined from a zero coupon yield curve that is constructed from Deposit rates and Eurodollar futures.

This method is used to value swap instruments and is a widely used method for determining rates to discount cash flows.

The Sum of Dividends term is based on actually declared or forecasted dividend amounts not yields whose ex-dividend date will occur during the remaining life of the futures contract. Since dividend amounts are used, they must be normalized by the index's divisor. The shortcoming of this method is that companies can change their dividend policy, namely per-share amount and ex-dividend dates, at any time such that the amount could be wholly included or excluded or that a previously forecasted amount is altered.

US-Steuerglossar

Despite this shortcoming, this method provides a significantly better estimate of the dividend component than the dividend yield method described below. We consider this approach to be the most accurate method of accounting for dividends. We monitor dividend announcements daily, adjust our perception of each company's dividend policy accordingly, and update our dividend forecast database. Thus, viewers of this web site can expect this component to be refined daily. Slippage and friction have intentionally been omitted from this equation.

Major arbitrage firms have sophisticated computer and communication systems in which to execute expeditiously both the equity and futures sides of their program trades, so slippage is minimized. The exception might be the time needed to acquire stock for short sales. Similarly, friction, in terms of commissions and other costs, is usually quite small for these arbitrage firms, given the frequency and size of their trades.

Deposit rates are usually quoted for time periods of one and two days and one week; LIBOR rates are usually quoted for one, three, six, and twelve months. Interest is calculated by multiplying the principal, the Deposit or LIBOR interest rate, and the actual number of days divided by The problem with this model is which interest rate to use.

When the number of days from now to the futures expiration coincides with one of the quoted Deposit or LIBOR rates, there is no ambiguity: Otherwise, one must choose the rate associated with the closest date; this introduces a slight discrepancy and is the reason that this approach is not favored here. The equation for this method follows:. This method reduces the interest rate used to to calculate the cost of carry by the annual dividend yield of the index.

Further, dividends are discrete entities, being either wholly included or excluded for a given program trade; using a smoothed, annual rate is inappropriate for determining the impact of dividends on a program trade, especially those that are short-dated. No portion of this page or web site may be copied, retransmitted, or redistributed in any manner for any commercial use.

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