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Minyan Mailbag



Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.

Mr. Harrison, Critters and Professors,

Good day to you all. Something I'm wondering about this morning as I take advantage of the pop to hedge my longs by shorting the SPYs: as I write this, the S&P 500 cash index is at 1124.68 and the SPYs, which nominally trade at one-tenth the index, are bid at 113.10, asked 113.11. The QQQs are trading at 36.38, with the NDX at 1463.49. Since the QQQs allegedly "should" trade at 1/40th the index, their nominal value would be 1463.49 ÷ 40 = 36.59.

It strikes me as unusual. With both the S's and N's quite perky, one of these instruments is trading at a good premium to the underlying index; the other at a good discount. They're both liquid enough for me not to suspect either manipulation or a momentary dislocation (which would be evident by looking at the bid/asked price rather than the last trade).

So what, if anything, is one to make of this price structure, and is there anything of value here that could be used as a trading tool? Perhaps you could address this in "Minyan Mailbag."

Many thanks,
Minyan Ben Richter

Minyan Ben,

SPY goes ex-dividend once per quarter, on the futures expiration day. The trustee of the ETF accumulates all the dividends it receives during the quarter from each individual company (remember that the ETF is a trust that holds the stocks themselves) and pays out that accumulated cash on the ex-dividend date.

As that date approaches, the cash held in the trust increases. It is this cash that gives SPY the appearance of trading at a premium to its portfolio. This "premium" will increase until June 18th, at which point it reverts to zero and starts the process all over again.

Few NDX components pay dividends so the QQQ rarely holds any cash and that's why the QQQ looks more transparent.

No positions in stocks mentioned.

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