Single stock futures are futures contracts on
individual stocks. There are currently over 80 well-known stock futures
such as IBM, eBay, and Philip Morris. These futures products provide
investors with a cost-effective vehicle for participating in U.S. equities
markets.
A stock futures contract is an agreement to deliver shares of
a specific stock at a designated date in the future, called the expiration
date. Most stock futures contracts are not held until expiration because
traders typically offset their position - selling if the trader is long or
buying if the trader is short.
The price of an equity futures typically
tracks the price of the underlying instrument nearly tick for tick, so trading
strategies followed in the stock market are generally transferable to the
stock futures market. Single stock futures may therefore be used with a
broad range of trading strategies and for a variety of portfolio management
needs.
When a stock future is traded, both the buyer and seller put up
a good faith deposit called margin. The margin requirement for security
futures is generally 20% of the underlying value of the securities, although
this requirement may be lower if the investor also holds certain offsetting
positions in cash equities, stock options, or other security futures in the
same securities account.
Advantages of Single Stock Futures
Selling A Stock Short
One plus is the ease and diminished expense of taking a short
position in a single stock. Selling a stock short in the stock market is
relatively complicated and expensive. A short sale in a stock necessitates
locating the shares to borrow and paying the broker loan rate of interest. You
must then wait for an uptick to sell the stock short. Waiting for an uptick to
sell a stock short in a declining market can be frustrating and costly. By the
time a particular stock upticks, it could be substantially below the price at
which you wanted it sold. However, in the futures market with the SSF
contract, you can sell a stock short just as easily as you can buy one. When
you sell a stock short using an SSF contract, you don’t have to wait for an
uptick. You can sell when you want, without going to the trouble of finding
the stock and without the expense of paying the broker loan rate of interest
on the shares borrowed.
Risk
Management
Selling SSF contracts can
also greatly contribute to risk management in an investor’s portfolio with
possible tax benefits. Instead of selling specific stocks in one’s portfolio
during market downturns, an investor could sell an equal amount of shares in
SSF as a hedge against his or her stock position. The ability to hedge a
particular stock facilitates holding onto the underlying position in the stock
market for longer periods of time, thereby potentially providing investors
substantial tax savings in long-term versus short-term
gains.
Speculation
An investor
without owning any stock could use SSF to speculate outright on an anticipated
increase or decrease in the price of a stock.
Margins
One
major difference between stocks and futures centers on the role of margins.
For stocks, margins, which are set by the Federal Reserve's Regulation T, have
been at 50% for retail investors and 15% for dealers since 1974. A stock
investor buying on margin borrows the difference, and can either pay the loan
down, or offset it when the security is sold. Futures margins, which are set
by the exchange, don't represent a down payment on an asset -- but are rather
a performance bond from the investor to the exchange clearinghouse. Margins
vary quite widely as a percentage of the underlying asset, but generally are
quite low. For example, the underlying value of the S&P 500 future is
hovering around $335,000, but the initial margin for a speculator is only
$23,438, or less than 7%. The futures investor doesn't have to pay interest on
the remaining 93%;indeed, futures investors can deposit T-bills and earn
interest on 90% of the deposit with a 10% haircut in their margin
accounts.
Cost
Advantage
SSF are traded in
100-share blocks, virtually mirroring the price movement in the single stock
on which the futures contract is based. A $1 move in an individual stock
equals $100 in an SSF contract. There is a big cost advantage here. In order
to control shares in a stock, you need to post at least 50% margin and pay
interest on the balance. In SSF, all that is required is approximately 20%, or
less than half the margin required in the stock market. Additionally, there is
no interest charge on buying or selling a stock on margin in SSF. Essentially,
you will earn or lose the same in an SSF contract as you would when buying 100
shares of stock.
Commission
Savings
In all probability, the
transaction costs in buying or selling a SSF contract amounts to less than
buying or selling the same 100 shares of stock in the stock
market.
Spread
Differentials
SSF offers investors
additional investment strategies. For example, if an investor feels the price
of one stock will decline or rise in relation to another stock he or she can
buy a SSF contract on one stock and sell a SSF contract on another, hoping to
profit from the spread differential between the two stocks anytime up to the
contact’s expiration.
No
Clearing Fees on Foreign Markets
Investor can also gain cross border exposure without the expense of
going through foreign clearing systems. Will circumvent many of the
difficulties faced by investors attempting to trade across jurisdictional
boundaries by providing access to UK, European and US shares on a single
trading platform.
Universal Stock futures transactions will be clear of
costs of accessing settlement systems across international
borders
Greater
Versatility
SSF allows a trader to
potentially profit no matter what direction the market moves. If a trader is
of the opinion that the stock market is going to fall, a trader can sell a
contract. A profit will be made if the trader then buys that contract back
later when the price decreases. This avoids the hassle of stock borrowing.
Electronic Trading
Platforms
SSF will are traded on
electronic trading platforms available to the public through the internet.
Investors will have universal access to the same sources of information,
delivery, and speed of execution that only a few years ago were available
primarily to professionals. Price fills are routinely provided in
seconds.
Frequently Asked
Questions
Are Single Stock Futures
better than trading stocks?
An advantage that single-stock futures have
over trading stocks is that you can sell without waiting for an uptick. So,
when the stock price is dropping, you might be able to take a short position
in single-stock futures sooner than if you wait for an uptick to sell the
stock itself.
Are Single
Stock Futures better than trading equity options?
Single-stock futures are more straightforward than equity
options, where you have to decide which strike price to trade within each
contract month, a decision that may involve an analysis of time premium. With
futures, it's an easy decision: Do you believe the price of the underlying
stock is going to higher or lower than the current price indicated by a
certain futures contract when that contract expires? Buy futures if you think
the price will be higher. Sell futures if you think the price will be lower.
It’s that simple!
How big are
Single Stock Futures contracts?
Each futures contract represents 100 shares of underlying
stock. That is the contract size used at LIFFE and by the Chicago Board
Options Exchange (CBOE) for equity options.
What are the margin requirements for Single Stock
Futures?
The initial margin
requirements for Single Stock Futures will be 20% of the contract value. If
so, margin would be $2,000 for one contract that represents 100 shares of a
$100 stock (contract value of $10,000).
How is a Single Stock Futures contract different from an
equity option
contract?
When you
buy or sell a single-stock futures contract, you are obligated to fulfill the
terms of the contract upon its expiration (unless
you offset the position
before then). When you buy an equity option contract, you have the right, but
not the obligation, to either buy or sell
100 shares of the underlying
stock at the option's strike price by the time the contract expires. When you
sell an equity option contract, you are
obligated to either buy or sell 100
shares of the underlying stock at the option's strike price at contract
expiration.
Customers wishing to trade Narrow Based Indexes and Single Stock Futures
Products, should contact United Futures Trading, 1-800-840-5617 to obtain
a copy of the required Security Futures Product’s Risk Disclosure Statement.
You may also down load the required risk disclosure statement from stock_futures_disclosure.pdf. Narrow
Based Indexes and Security Futures Products are not suitable for all investors.
The risk of loss associated with these products can be substantial.
CLICK HERE TO RECEIVE A FREE KIT ON SINGLE STOCK
FUTURES
