Single Stock Futures offer investors a cheaper way of investing in the equity markets and should, therefore, have considerable appeal. They represent one the most interesting developments in the field of financial derivatives. This is both because of their trading potential, which is very large, and the fact that they have only recently became legal in the US.
With SSF, investors are now able to trade futures contracts on some of the most popular individual stocks traded on stock exchanges in the US, or on “baskets” of stocks in selected sectors. SSF include approximately 50-70 of the most popular and actively traded stocks in the U.S., such as Microsoft, Pfizer, General Electric, IBM, Citigroup, AOL Time Warner, and Johnson & Johnson, to name a few. In addition, investors can also trade Narrow Based Indices (“NBI”). NBI are small groups of stocks in a concentrated area of the equities market, such as airlines, pharmaceuticals, semiconductors, energy and automotive.
Advantages
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.SpeculationAn 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
Investors 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 QuestionsAre 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.
› Click here for a list of Single Stock Futures
Narrow Based Indices
Narrow Based Indices are futures contracts on small groups of stocks that allow an investor to take a position in a concentrated area of the equities market. Each narrow-based index will typically include three to nine companies in a specific industry sector.
A OneChicago narrow-based index futures contract is an agreement to deliver shares of the underlying stocks at a designated date in the future, called the expiration date. At all times, four expiration dates will be available for trading OneChicago narrow-based indices. OneChicago narrow-based indices are physically settled at expiration.
Using these indices, investors can take a long or short position in a concentrated basket of stocks without incurring multiple transaction fees.
Margin requirements are generally 20% of the cash value of contract, 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.
No uptick is required to establish a short position in OneChicago's products. Short sellers may also benefit from eliminating the costs and inefficiencies associated with the stock loan process.
› Click here for a list of Narrow Based Indices
Customers wishing to trade Narrow Based Indexes and Single Stock Futures Products, should contact Park Avenue Asset Management a 877-727-5836 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 http://www.nfa.futures.org/compliance/sfp_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.