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What is Fair Value?

One of the most frequently asked questions from viewers calling into CNBC's morning Squawk Box is  "What is Fair Value?". Every day CNBC gives viewers theoretical prices for Fair Value along with certain levels for the premium that would theoretically cause program buying or program selling to hit the markets. So naturally a lot of viewers call in asking about Fair Value and wanting to know exactly what it is and what it means. According to Professor Hans Stoll at Vanderbilt University, the formula for Fair Value is really very simple.  Of course that was easy for him to say, since he was one of the world's leading academic authorities on equities markets, listed options, program trading, and a bunch of other stuff about stock markets. Sadly Hans passed away in March of 2020. Here is Professor Stoll's formula: 

FV = S [1 + (I - D)]

  • Where "S" is the S&P 500 Stock Index.  The ticker symbol is SPX and/or INX on most platforms.

  • Where "I" is the amount of Interest paid to your banker or broker to borrow the money to buy all of the stocks in the S&P 500 Index. The interest is calculated based on a percentage lending rate (R) from the current date (today) until the date that the S&P expires in March, June, September, or December.

  • Where "D" is the amount of Dividends paid to you from the companies that you own in the S&P 500 Index that pay a dividend.  The dividends are paid to you based on the record dates for any stock in the Index that is announced between the current date (today) and until the date that the S&P Futures Contract expires in March, June, September, or December. This dividend income is expressed as a percentage rate too.

That's it.  Very simple.  Fair Value is nothing more than the value of S&P 500 Index, plus the interest I pay my broker to buy all of the stocks in it, minus all of the dividend checks I get from those same stocks.  Now that you know what Fair Value is, you can go on to learn exactly what it means and how it works.  For example, do you realize that Fair Value is basically irrelevant for almost all traders?  And that the theoretical levels announced on CNBC for program buying and program selling are totally irrelevant in the real world of trading? 

So what is important?  "Knowing exactly when program buying or program selling will hit the markets today."  If you know that, then you have an edge and are way ahead of everyone else in day trading for your own account.

And that is exactly what our Program Trading Research identifies before the markets open every day.  We already know the exact premium execution level for program buying or program selling for today. That information is available for you here every day for free.   But knowing in advance what time these levels will hit is a little harder for us to figure out.  Therefore we charge a fee for that information which is included in all of our research reports.  Now you can make our Program Trading Research work for you and your trading.  And, if you really want to learn everything about FV, the premium, program buying, program selling, program trading pattern recognition, and everything you need to know about trading, then join us for our Program Trading Seminars.

What!  You didn't get the same number that is on CNBC?  That's because they subtract the S&P 500 Stock Index price from the FV in the above formula and then express FV as the difference number.   Remember that once you figure out the Fair Value for today, it doesn't change until tomorrow.  And that every day it is a little more, or a little less (depending on interest rates) as we get closer to the S&P 500 Stock Index expiration in March, June, September, or December.  Also remember that FV and premium are very very different.

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