InvestorQ : Do the futures premium and discount tell you something about the future direction of the market?
Ria Jain made post

Do the futures premium and discount tell you something about the future direction of the market?

Answer
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Arti Chavan answered.
1 year ago


This is far simpler to understand and traders use this to decide whether to buy in cash market or in futures market. Normally, futures quote at a premium to the cash market as there is an interest cost to funds. The spread may be in the range of 0.7% to 1.2% per month depending on the volatility of the stock. A high premium is normally a sign of bullishness and one can look to accumulate in the cash market. What about discount on futures? The most common reason for discount on futures is the declaration of dividends as dividends accrue to the cash market buyer and not to the futures buyer. But there are other occasions when the futures quotes at a discount without dividends. This could be a signal of cash market selling by institutions and should be construed as a negative signal on the stock. You need to position yourself by selling futures or buying put options. These are some of the basic and simple rules that all investors and traders can use to glean some wisdom from the markets. Of course, we recommend that you look at the fundamentals of the company and talk to your advisor before taking an investment decision. But, the beauty of these techniques is that they are simple, workable and the data is available in the public domain.