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For instance, at this current moment the SP500 index is at 2094 while the futures on this market, symbol /ES with a contract of June is at 2088.

Can someone please explain how traders and investors use this price difference to trade? And most importantly how the futures market affects subsequent moves in the stock market?

  • It doesn't, the two reflect each other using fair value calculation and in general are arbitrage free. The difference between 2094 and 2088 is 6 points, which is expected payout of dividends between now and june which should lower the index by that much, thus you get a "discount" to buy june's index with dividends stripped. Also see money.stackexchange.com/questions/9959/… – Dima Dec 12 '16 at 3:11
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Can someone please explain how traders and investors use this price difference to trade?

People use the price difference for small arbitrage between the futures and spot markets, where the larger spreads are reflected in the options markets. The spread in the options market dictates the VIX which many investors also use in their decision making process.

And most importantly how the futures market affects subsequent moves in the stock market?

The futures market effects the stock market where large contract holders move the entire futures price. This causes reactionary moves amongst all of the aforementioned arbitragers, who are hedged between the futures and spot markets.

With the /ES this is reflected down to actual individual stocks based on their weightings in the S&P 500 index. Many of those stocks have smaller companies that are also linked to them, such as a widget manufacturer for a gigantic ACME corporation listed in the S&P 500.

  • Arbitrageurs have legs in both markets. They will affect both the spot and futures market and don't favour one over the other. – hroptatyr Jun 6 '15 at 20:35
  • @hroptatyr yep thats true. I don't know a brief way to explain how options spreads effect VIX, how VIX effects options prices, how options prices effect hedging ability, how VIX futures operate.... and how that all relates back to the /ES and SPX index! OP needs to read a book – CQM Jun 7 '15 at 2:52

protected by Chris W. Rea Oct 14 '16 at 11:52

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