Personal Finance & Money Asked on January 21, 2021
A beginner question, I am puzzled about futures on the S&P500.
I believe the futures contract arranges a price to purchase the underlying at fixed dates in the future (such as expiring in March); most often this date is not tomorrow, and is often weeks away.
However, people seem to talk about the overnight value of the future as something
that might relate to tomorrow’s price, for example in this question
how to use the sp500 future to predict the stock market
If the contract is for a month in the future, why would it have much to do with the price tomorrow morning?
For example, if the S&P is at 3500, and I am selling a contract for 6 months (or even 1 month) in the future, I may believe the index will rise by 5%, and thus should be unwilling to sell a contract for near the price that it will be tomorrow.
Index futures contracts are guaranteed to settle at the index when the contract expires (at final settlement). Therefore, they are affected by the same information as the cash market is.
If say there is some news that affects the market's expectation future performance of companies (say, a covid vacine is found and the index goes up 10%), then it's likely, given everything we know now, that the index will be similarly moved when the futures contract expires (ie, the index level in the future will probably be around 10% higher than it is now).
So, in effect the futures contract market is integrating the same information into the contract price that the underlying stock market is also doing. In efficient markets, this happens naturally, however, it's not guaranteed.
It may be that in this case, the futures contract market is open at times when the cash stock market is not. In which case, the futures market can integrate new information when the cash market can't yet, and will likely do so when it opens again.
Correct answer by ThatDataGuy on January 21, 2021
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