Frequently Asked Questions
What
is Program Trading?
The media talks
about program buying or program selling constantly. CNBC lists
Fair Value and program trading buy/sell levels every day. Exactly
what is program trading?
Program
trading is a generic term used to describe a type of trading in
securities, usually consisting of stocks traded on the New York Stock
Exchange and their corresponding options traded on the Chicago Board
Options Exchange and/or the American Stock Exchange; and, the Standard
& Poor's 500 Index commodity contract traded on the Chicago
Mercantile Exchange. The trading of these items is based purely on their
price in relation to each other on a predetermined basis; and not, on
any fundamental reason such as an individual company's earnings,
dividends, or growth prospects; or, on any overall economic reasons such
as interest rate movements, currency fluctuations, or governmental or
political actions. There are different types of program trading
that we will describe later along with how you can benefit from the
different types. According to the New York Stock Exchange, program
trading accounts for about 45% of the trading volume on that exchange
every day.
What
is Fair Value and what are Premium Execution Levels?
The
media also talks about Fair Value constantly and the "premium" or
"spread" and certain execution levels. What are they talking
about?
The "premium"
(PREM) or
"spread" is the difference between the most active S&P 500 Stock
Index Futures Contract (the spoos) minus the
actual S&P 500 Stock Index (cash). That difference, which
usually ranges between $5.00 to $-5.00, and slowly decays or rises as we reach
the S&P 500 Futures Contract expiration, is what program trading is
based on. When the PREM difference rises to a certain execution
level, "buy" programs kick in. Our large institutional clients
then buy the stocks in the S&P 500 Stock Index on the New York Stock
Exchange and sell the S&P 500 Stock Index Futures Contract against
those positions on the Chicago Mercantile Exchange. When the PREM
difference drops to a certain execution level, "sell" programs kick in
and our clients do the exact opposite. These transactions
have extremely low risks because of the abnormal market differences in
the PREM as traders capture those few points of profit before the PREM
returns to normal and/or Fair Value.
This type of program trading is called index arbitrage and is very
common. But it usually accounts for less than 10% of all program trading
activity done each day.
What
about your Program Trading Research?
What does Fair
Value and PREM execution levels have to do with your firm and your
research?
Our Program
Trading Research is designed to tell you in advance when
the PREM will reach the high and low points of the day. By knowing
this in advance, you can fine tune your trading to take advantage of
these abnormal market situations just like the big program trading
firms do. However, our projections are just that and no matter
how accurate they have been in the past, there is no guarantee that they
will continue to be accurate in the future and hit at an exact projected
time. Neither can we guarantee that by knowing what the PREM will
do in advance, that you will not have loses with your trading.
Please click
here for additional warnings on program trading
strategies.
How
do you do it?
I've seen your projections and it amazes me
how you guys can predict in advance which way program trading will move
the markets and the actual time it will happen each
day.
You're
right. And that is exactly how we felt when we discovered our
program trading pattern recognition and time and direction projections
during 1983 and 1984. We track every single trade in the S&P
500 Stock Index Futures Contracts, the S&P 500 Stock Index, and the
PREM every minute of every market day. We have since Wednesday,
April 21, 1982, the day that the S&P 500 Stock Index Futures
Contract began trading on the CME. Each time that movement in the
PREM creates a "buy" program or a "sell" program we track the
corresponding up or down move in the Dow Jones Industrial Average, the
30 stocks in that average, the S&P 500 Stock Index, and the 500
stocks in that index, to see if buy or sell programs actually moved the
Dow 25 points or more, and exactly what stocks in the averages moved the
most. If so, our computers log that exact time of day and keep a
file of those times for us automatically. We group those exact
times into the 81 five minute time intervals or blocks that constitute a
trading day. If the Dow does not move, we then ignore that PREM
movement no matter what the media says. Many times, novice
journalists blame program trading for a move in the Dow; when, in fact,
programs were not present nor did they affect the Dow or the other
markets at all.
By knowing the
exact times that program buying or selling has moved the Dow Jones
Industrial Average and the S&P 500 Stock Index in the past, we are
able to project into the future at what times program buying and program
selling is most likely to happen tomorrow. Additionally; by knowing
exactly which stocks have moved the most in those indexes during a
buy or sell program in the past, we are able to project into the future
exactly which stocks in those indexes will move the most
tomorrow. However, our projections are just that, and no matter how
accurate they have been in the past, there is no guarantee that they will
be accurate again in the future at an exact projected time. Most
days have 5 or 6 projected times that the Dow and S&P 500 should
move but some days some of those times may not be relevant. Our standard
deviation is about 6 minutes.
What
happens when you are wrong?
I've seen your
projections and the times given that program trading will hit the
market, but then nothing happens. Does that make you
wrong?
Yes and no.
The projected times given, usually five or six times a day, in some
cases do not move the Dow or the S&P 500. Usually the spread rises
or drops to the high or low of the day near these times but without any
follow through and therefore no programs hit to move the markets.
So in that sense we are wrong. But by using the projected times
any way even if the results are not perfect on every time given, we
limit our exposure to losses. For example, if we expect program selling
at around 10:35 and we expect to go long or buy calls at that time, and
the spread narrows but no programs hit to drive the Dow down for us,
what have we lost? Nothing. We simply do not buy at this
projected time and wait for another entry point. So yes, we were wrong,
but no, we did not lose on this type of hypothetical
trade.
What
about trading the S&P?
"I day trade the
S&P. How can I use your research
effectively?"
By studying
our Program Trading S&P
Report, you will know in advance which way program
trading will move the markets and at the most logical time of day it
will happen. Then you can take a position in the S&P near
those times. For example, if our computers project the PREM low
for the day at 10:35 and the PREM high for the day at 1:55, then you
have a game plan for trading the S&P on that day. We find that
our research is reliable and that trading the S&P with our research
can be a very beneficial. But we cannot guarantee that you will be
profitable, or that you will not have losses. Click here for
additional warnings about that.
What
about trading the E-mini?
I trade the
E-mini. The margin is less and I am more comfortable with it. How does
that work with your service?
The E-mini
contract is 1/5th of the S&P. You can use our Program
Trading S&P Report to trade the e-mini too.
Once you have built up your equity, you can switch to the other contract
if you like. But remember, just because the E-mini contract is
1/5th of the spoos, does not mean that it is safer or not as
risky. The E-mini is more liquid though and very fast to
trade. And, in our opinion, is the future for your trading.
In the next few years more and more traders will be switching to the
E-mini contract for this liquidity and ease of trading
electronically. It is already the most active trading vehicle in
the world. See below about the widening spreads in OEX put and
call options and the resulting move of those traders to the
E-mini.
What
about trading the Dow?
I trade the Dow
Jones contract. The margin is less and I am more comfortable with
it. How does that work with your service?
Very
well. We were contracted by certain future market makers in the
Dow contract before its debut on the CBOT. We were consulted about
the possibilities of index arbitrage in this contact with the stocks in
the Dow Jones Industrial Average. All of that experience is
readily available each day for you and your trading. You can use
our Program Trading S&P
Report to day trade the Dow contract. But, the Dow
contract is very slow, compared to the S&P or E-mini. And it
is not very liquid. So once you have built up your equity, you can
switch to the S&P if you like. Program trading is based on the
S&P. And most traders eventually switch to the S&P as
their comfort level increases since the S & P's are more liquid and
have better fills. In the meantime, you should take a close look
at trading the E-mini.
What
about trading the OEX?
I trade puts and
calls on the OEX. How can I use your service with option
trading?
We have traded
OEX options since they were invented. In fact, we traded listed calls
before puts were invented. All of that experience is readily available
each day for you and your trading. We have built one of the best
reputations on the street for our options expiration week projections
alone. But that type of trading is only for people that can
afford to lose. And there is no way we can guarantee that you will
not have loses trading options. Why? Because, as you know,
options are the hardest thing in the world to trade. They make the
S&P look easy by comparison. In the example above, we would
recommend buying calls (always in the money) during program selling at
10:35 and then sell them during program buying at 1:55. Our
clients tell us that by fine tuning their trades this way they can
sometimes get very close to the low or high price of the day. One
secret you need to know is that the bid and offers you see for your OEX
options are based not on what the OEX is doing, but on what the S&P
500 Stock Index Futures Contract (the spoos) is
doing. Buy using our Program Trading S&P
Report, you can know what the S&P and therefore your
OEX options are going to do and when they will do it. In recent
years many traders have switched from OEX options to the E-mini
contract, since the E-mini is more liquid and easier to trade
electronically. With wider spreads in options and less and
less volume, that trend continues in 2004 with more and more traders
moving away from options altogether. Remember that OEX
options are securities and cleared by stock brokerage firms.
Moving to the E-mini requires a new broker. And a commodity
futures clearing firm.
What
about trading stocks?
"I trade stocks
because I've tried options and lost and commodities scare me. How
can I use your research to trade stocks?
The same way
specialists do on the floor of the NYSE, and NASDAQ market makers do on
Level III. We track every stock in the Dow Jones Industrial Average, the
S&P 500 Stock Index, the S&P 100 Stock Index, and the NASDAQ 100
Stock Index. Each night we project every stock's theoretical high
and low for the next day along with the projected high with program
buying and the projected low with program selling. This
information, our Program Trading Stock
Report, is sent to our clients on the NYSE that are
specialists in those stocks and to certain NASDAQ Market Makers on Level
III. Isn't it about time you knew in advance what the specialists
and the market makers in the stocks you are trading already know?
Surely that information coupled with the exact time of the day that
those prices should hit would help you. Our clients tell us that
they consistently hit near the high or low of the day and pull an extra
3/8 to 7/8 out of their stock trades. In addition, many clients
use our information to set stop losses in positions that they hold
overnight, knowing that the specialists and market makers would have
taken them out of the trade if they had set an incorrect stop by
themselves. We have not independently verified these claims from
our clients. Nor can we guarantee that you will have the same
result with your own trades or that you will not have losses.
Please click
here for more information about that.
What
about just letting you trade for me?
"There is no way
I can watch the markets every day. I need someone to help with my
investments. Do you handle managed
accounts?"
No. We
do not accept nor solicit money from the general public. We are
not registered with the United States Securities and Exchange Commission
as Investment Advisors. We are not registered with the United
States Commodity Futures Trading Commission as Commodity Trading
Advisors, nor do we advertise or hold ourselves out to the general
public as such.