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Several questions about futures
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Several questions about futures

  #1 (permalink)
Elite Member
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Several questions about futures

I'm a bit confused here.

Why is there a difference between E-Mini S&P 500 (ES) and S & P 500 index price on the close of the delivery day. ES June contract just expired yesterday (17th of June) and last trade was made a moment before the close at 8:30AM at price of 1280.75. At 830 Chicago time S&P 500 index was 1274.44. Why is there about 0.5 percent difference between the prices? Why would anyone buy ES at that level when it's about to expire? That's a immediate loss of $315.5 per contract. I don't understand...

If I have a position on Crude Oil future CL, either long or short and I fail to close it before the expiration what happens? Has this actually ever happened to anyone? Can it be settled with cash or do I have to actually take a delivery of 1000 barrels of oil (if im on long) ??

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  #3 (permalink)
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The ES is a separate instrument from the pit traded S&P and the settlement price doesn't have to be the same.
I guess what I'm saying is they are two different things. As far as holding crude past the expiration, they won't call you to ask you where you want it delivered. Your broker will close out your posistion and probably impose some kind of fee on you

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  #4 (permalink)
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kbit View Post
The ES is a separate instrument from the pit traded S&P and the settlement price doesn't have to be the same.
I guess what I'm saying is they are two different things. As far as holding crude past the expiration, they won't call you to ask you where you want it delivered. Your broker will close out your posistion and probably impose some kind of fee on you

Do you have any idea how big fees are we talking about when the broker has to close the position before expiration?

The idea of ES is to buy some contract to lock S&P 500 index price in the future. So as the time passes people evaluate the forward price of the underlying individually and create the market for it and the price fluctuates. Eventually when the contract is about to expire there is less uncertainty about the future price and price should converge to the spot price. On the expiration it should be same as the spot price, logically? What is wrong in my reasoning?

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  #5 (permalink)
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rounder8 View Post
Do you have any idea how big fees are we talking about when the broker has to close the position before expiration?

The idea of ES is to buy some contract to lock S&P 500 index price in the future. So as the time passes people evaluate the forward price of the underlying individually and create the market for it and the price fluctuates. Eventually when the contract is about to expire there is less uncertainty about the future price and price should converge to the spot price. On the expiration it should be same as the spot price, logically? What is wrong in my reasoning?

Markets aren't logical...especially at expiration time because of lower liqiudity and everyone reposistioning.
On your oil question I would guess a penalty of around a $100, every broker is different and I haven't done that so I can't say for sure.

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  #6 (permalink)
Fortitudo et Honor
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rounder8 View Post
Do you have any idea how big fees are we talking about when the broker has to close the position before expiration?

The idea of ES is to buy some contract to lock S&P 500 index price in the future. So as the time passes people evaluate the forward price of the underlying individually and create the market for it and the price fluctuates. Eventually when the contract is about to expire there is less uncertainty about the future price and price should converge to the spot price. On the expiration it should be same as the spot price, logically? What is wrong in my reasoning?

What you're describing is the contango. Contango - Wikipedia, the free encyclopedia

It works best on physical futures where there's a fairly stable, constant storage price.

Essentially, with oil, you could calculate how much money it would cost you (per month) to store crude and the rate would be very similar to the slope of the cantango. Industrial storage costs aren't very volitile.

For equities and indexes however, the cantango is based on volitility (much like an option) so just because you expect the prices to converge, they may not do so predictably.

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Also consider that the financial futures could have just as easily been called something else to separate them from commodity futures. It was probably a marketing thing to get commodity futures traders to trade them back in the day to get the market going for them.
Locking in a future S&P price to me is too simple of a commodity futures way of viewing the instrument. There is a million strategies and variables created from purely trading S&P risk back and forth without having to worry about the underlie as much.
I would assume that price is the convergence when you factor in directional risk for that moment and the transaction cost of buying/selling baskets of stock against it.

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