Many investors use S&P Futures to get a feel for how the market is going to open. The futures should sell for a certain premium over the most recent close of the S&P 500. This premium is known as fair value. If the spread between the futures and the index is more than fair value, the index tends to rise shortly after the open. If the spread is less, the index tends to fall shortly after the open.

Fair value is calculated using current interest rates and the amount of time left until the expiration of the future. To get a ballpark estimate of fair value, take the amount of time left in the future, expressed as a percentage of 3 months, and multiply by twelve. For example, the future tracked by CNNfn currently expires on the third friday in September. As of the third friday in July, the future had 2 months left until expiration. 2 months divided by 3 months results in 66 2/3%, multiplied by 12 equals 8. So on that date, fair value was ABOUT 8. This is a very rough estimate and the formula would change as the S&P and/or interest rates rise or fall.

Check out CNNfn for a current S&P Futures quote.

S&P Futures

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