What Are Pre-Market Futures?

The value of the S&P 500 index is a weighted average of 500 stocks. An S&P 500 index future is a contract that predicts what the value of the index will be at the contract expiration date. S&P 500 futures expire quarterly -- in March, June, September and December. The next expiration date is called the “front month.”

At any given time, the “futures price” quoted on the S&P 500 index futures contract refers to the anticipated price of the index on the expriation date of the front month. The value of an S&P 500 index futures contract, as traded on the Chicago Mercantile Exchange, is $250 times the futures price. If the futures price of the S&P 500 stands at 1,470, the contract would be valued at $367,500.

At the close of trading on expiration day, the final -- or “settlement” -- price of the contract is exactly equal to that day’s closing price of the index.

Stocks in the S&P 500 trade throughout the day until market closing time at 4 p.m. EST. The closing value of the index is based on the final trade of each component stock. Once set, the index value doesn’t change until the stock market re-opens the following morning at 9:30.

CME index futures trading closes twice during a 24-hour cycle. The first close occurs at 4:15 p.m. EST. The difference between the futures afternoon closing price and the stock market closing index value is called “the spread.”

Futures trading restarts at 4:45 p.m. and continues all night long. The second close occurs at 9:15 a.m. EST. Futures resume trading 15 minutes later, when stocks start trading again.

The futures price is based on the current supply and demand for the futures contract. Since futures continue trading after stocks close, it is not surprising that the futures price can constantly change throughout the night as new information becomes available.

Apart from this up-to-the-second futures price is “fair value,” which is derived from a complex calculation that factors in the last closing value of the index, interest rates and time until contract expiration. Fair value tells you the theoretically “correct” size of the spread and doesn’t change until the index’s next closing price becomes available.

As an example, suppose the S&P 500 index closed yesterday at 1470 and futures closed at 1472, so the spread is +2.00. Today’s fair value reading is calculated at +6.00, implying a “correct” final settlement price of the front month contract of 1476, or six points above yesterday’s index closing price. Overnight, the futures contract climbed another four points to 1476, so it is priced precisely at fair value and gives no directional indication regarding stocks.

Now, suppose instead the futures contract gained only two points overnight and stands at 1474. Even though futures are up relative to their previous close, they are down relative to fair value. Since futures are below fair value, the pre-market indication is for a weaker stock market opening.