TAIEX futures vs the index: basis, premium and discount in tests
TAIEX futures follow the cash index but trade at their own price. The gap, called basis, changes with interest, dividends and trading hours and shrinks to zero at settlement, so test futures strategies on futures data.
By Soren Huang · Published · updated · Editorial policy
Contents
- How are TAIEX futures and the cash index related?
- What do premium (正價差) and discount (逆價差) mean?
- Why do futures and the index meet at expiry?
- Who leads when the stock market is closed?
- Why don't index backtest results transfer to futures?
- How should you set up a futures test so basis is handled?
- Frequently asked questions
How are TAIEX futures and the cash index related?
TAIEX futures (台指期) track the TAIEX cash index (大盤), but they are a separate price. The gap between them is the basis. It is a premium (正價差) when futures trade above the index and a discount (逆價差) when they trade below it. The gap shrinks to zero at settlement, so a strategy tested on the index does not carry over unchanged to futures.
The cash index is the TAIEX value that the Taiwan Stock Exchange calculates from the prices of its component stocks. TAIEX futures are contracts on the Taiwan Futures Exchange (TAIFEX) that settle in cash against that index. The standard contract (TX) is worth NT$200 per index point, and the Mini-TAIEX contract (MTX) is worth NT$50 per point. The futures price is set by its own buyers and sellers, but it cannot drift far from the index for long.
A simple picture helps. A futures contract is like reserving a basket of all TAIEX stocks for delivery on settlement day. If you reserve the basket instead of buying it today, you keep your cash and earn interest on it. You also miss any dividends the stocks pay before delivery. The fair price of the reservation adjusts for both. Fair value is the futures price that makes holding futures and holding the stocks cost the same. A common approximation is:
Fair value ≈ S × (1 + r × t) − D
Here S is the index level now, r is the yearly interest rate, t is the time left until expiry as a fraction of a year, and D is the dividends, in index points, that the component stocks are expected to pay before expiry.
Hypothetical example
The index is at 20,000. The interest rate is 1.5% a year and expiry is 30 days away, so t ≈ 30 ÷ 365 ≈ 0.082. Interest adds about 20,000 × 0.015 × 0.082 ≈ 25 points. Expected dividends before expiry are 150 points. Fair value ≈ 20,000 + 25 − 150 = 19,875. A futures price about 125 points below the index is therefore normal in this case, not a sign of fear.
When the futures price moves too far from fair value, arbitrage traders buy the cheaper side and sell the more expensive side. This pulls the two prices back together. The pull is not perfect, because trading costs, limits on short selling and uncertain dividend estimates leave a band in which the basis can move freely.
What do premium (正價差) and discount (逆價差) mean?
Premium and discount describe the sign of the basis, and the sign comes mostly from interest and expected dividends. Basis is the difference between the futures price and the cash index. In Taiwan, traders usually quote it as futures minus index. Many textbooks use index minus futures, so check which sign a source uses before you compare numbers.
| Term | Futures vs index | Basis (futures − index) | Typical cause |
|---|---|---|---|
| Premium (正價差) | Futures above index | Positive | Interest larger than dividends left before expiry, or strong buying in futures |
| Discount (逆價差) | Futures below index | Negative | Large expected dividends before expiry, or strong selling in futures |
Hypothetical example
In March the index is 20,000 and TX trades at 20,060, a premium of 60 points. On one TX contract that is 60 × NT$200 = NT$12,000. In July the index is again 20,000, but TX trades at 19,820, a discount of 180 points, because many component stocks will go ex-dividend before that contract expires.
The TAIEX is a price index. When a company pays a cash dividend, its share price drops on the ex-dividend date, and the index drops with it. Many large Taiwan companies go ex-dividend in the summer months. Futures that expire after those dates price the drop in advance, so they often show a wide discount during the dividend season. Commodity futures use different words for the same idea; see backwardation vs contango and roll gaps in continuous backtests.
Why do futures and the index meet at expiry?
The basis must reach zero at expiry, because the contract settles at a price calculated from the index itself. Convergence is the process in which the futures price moves toward the index as expiry approaches, until the two are the same at settlement. Interest and dividend effects shrink day by day, because less time and fewer dividends remain before expiry.
The last trading day of a TAIEX futures contract is the third Wednesday of the contract month. The final settlement price is the simple average of the TAIEX index values during the last 30 minutes of the cash market (13:00 to 13:30) on the final settlement day. This value can differ from the 13:30 index close. A position held into expiry settles at that price, not at the last futures trade. The TAIEX futures settlement dates tool lists the settlement days, so you can mark them in your test period.
Convergence also explains roll gaps. When you move from the expiring contract to the next one, the new contract has a full month of interest and dividends in its price. A continuous futures series that joins contracts end to end therefore jumps at each roll. How to handle that jump is covered in 台指全 and all-sessions TAIEX futures data for backtests.
Who leads when the stock market is closed?
When the stock market is closed, the futures price is the only live price, so it leads and the index catches up at the next open. Lead-lag is the pattern in which one price reacts to news first and the other follows later. While both markets are open, arbitrage keeps them moving almost together. Outside those hours, only futures can react.
| Taiwan time | TAIEX futures (TX, MTX) | TAIEX cash index |
|---|---|---|
| 08:45–09:00 | Trading (regular session) | Not yet open |
| 09:00–13:30 | Trading | Updating |
| 13:30–13:45 | Trading | Stopped at the 13:30 close |
| 15:00–05:00 next day | Trading (after-hours session) | Closed |
During the after-hours session, futures react to US markets and overnight news. Many trading screens still show a basis at night, but it compares a live futures price with an index frozen at 13:30. That number is not a real premium or discount. It mostly measures how far the market has moved since the stock close. At 09:00 the index opens with a gap, and much of that gap was already in the futures price overnight and in the 15 minutes from 08:45.
Exchanges can change session hours and contract specifications, so check the contract specifications page on the TAIFEX website before you set up a test. Your own time zone is what the futures market hours tool uses for these sessions.
Why don't index backtest results transfer to futures?
Index results do not transfer because a futures position earns the index move plus the change in basis, and it trades in hours and at costs the index does not have. The index cannot be traded directly. A test on index bars measures a price you could never fill.
Hypothetical example
A rule buys when a signal appears and sells on settlement day. On index bars it buys at 20,000 and sells at 20,000: a result of 0 points. On futures, the same signal buys TX at 19,880, a 120-point discount. At settlement the contract converges to 20,000. The futures test shows +120 points, or NT$24,000 per TX contract before costs. A short trade on the same signal would show −120 points. Neither result came from the signal. It came from the dividend discount closing.
| What differs | Index bars | Futures bars |
|---|---|---|
| Price level | Index points | Index plus basis; level-based rules shift by the basis |
| Dividends | Index drops on ex-dividend dates | Drop already priced in the discount |
| Hours | 09:00–13:30 only | Earlier open, later close, after-hours session |
| Gaps | One overnight gap at 09:00 | Moves spread through the night; roll gaps between contracts |
| Expiry | None | Settles at the 13:00–13:30 average of the index |
| Costs | None, because it cannot be traded | Commission, futures transaction tax, slippage |
Indicators change too. A moving average or breakout level calculated on index bars uses different highs, lows and closes than one calculated on futures bars. The differences are small in quiet markets and large around the open, at rolls and in the dividend season.
How should you set up a futures test so basis is handled?
Test on the futures contract and session you will trade, and make every choice about basis explicit. The steps below cover the main decisions. Once those basis choices are written down, the strategy validation in AlphaPrime (Valynox) applies one set of thresholds, walk-forward analysis included, to every version of the test.
- Use futures bars, not index bars. Pick the contract you will trade, such as TX or MTX, so the price, tick size and point value match your orders.
- Choose the session. Decide whether the strategy trades the regular session only or also the after-hours session. Then use data that covers exactly those hours.
- Choose a roll rule and adjustment. Decide when you move to the next contract and whether the series is back-adjusted. The basis jump at each roll should not create fake profits or losses.
- Mark settlement days and the dividend season. Check how many trades are held into settlement or across the summer discount, and whether the results depend on them.
- Include costs and next-bar fills. Add commission, tax and slippage per round trip, and fill orders on the next bar after the signal.
- Compare long and short results by month. If long trades win mainly in dividend months, the edge may be the discount closing rather than the signal.
In AlphaPrime, the backtesting settings cover data resolution, trading sessions, fees and slippage, and next-bar execution always applies, so steps 2 and 5 are part of every run. Strategy generation then searches entry and exit rules on the futures prices you load, with the same settings for every candidate. The Performance Report shows periodic performance and long and short analysis, which covers step 6.
What this means if you use AlphaPrime: AlphaPrime supports TAIEX futures bar data, so run the search on the contract and session you trade, not on the index. Basis, night moves and settlement are then already inside every result you compare.
Frequently asked questions
Why is the TAIEX futures price different from the index (台指期跟大盤為什麼不一樣)?
Futures price in interest until expiry and subtract the dividends expected before expiry, so their fair value is not equal to the index. Buying and selling pressure in futures can push the price a little further from fair value. The gap closes at settlement, when the contract settles at a price calculated from the index.
What is the difference between 正價差 and 逆價差?
正價差 (premium) means the futures price is above the cash index. 逆價差 (discount) means it is below. In Taiwan the basis is usually quoted as futures minus index, so a premium is a positive number and a discount is a negative number.
Why do TAIEX futures often trade at a big discount in summer?
Many large Taiwan companies go ex-dividend in the summer months, and the TAIEX price index drops by the dividend on each ex-dividend date. Futures that expire after those dates subtract the expected dividends in advance. The discount therefore mostly reflects dividends, not a bearish market view.
Can I backtest a strategy on the index and trade it on futures?
You can use index data for a first idea, but the results will differ. Futures add basis changes, an after-hours session, roll gaps, settlement and trading costs. Retest the strategy on futures bars of the contract and session you trade before you rely on it.
Does basis matter for day trading TAIEX futures?
Within one session the basis usually changes little, so its direct effect on an intraday trade is small. The trading hours still matter: futures open at 08:45 and close at 13:45, while the index runs from 09:00 to 13:30. Signals built on index bars miss those extra minutes and the overnight move.