Single Stock Futures – The ultimate Derivative?
SSF represent a revolution in stock trading.
(Hopefully) they will be easy, cheap and efficient to trade.
They are cheap, easy to understand and provide the necessary leverage so as to improve
my trading opportunities.
So far popular in Spain (MEFF), London (LIFFE) and India (NSE).
Obviously the US is the ultimate test.
They are trading at One Chicago
40 % CME
40 % CBOE
10 % CBOT
10 % “staff”
What is a SSF?
An agreement to buy or sell a contract, based on an underlying equity for settlement or
delivery at a pre specified date in the future.
1 contract is always 100 shares
The settlement is always Physical delivery. (Never cash).
Margin Requirement 20 %
For $ 2000
A) You can buy 20 shares of a 100 $ stock. (Or 40 shares of a 50 $ stock)
B) Using SSF
Control 10,000 $ worth stock
i.e. Buy 1 SSF contract of a 100 $ stock (thus controlling 100 shares)
Or buy 2 SSF contracts of a 50 $ stock (thus controlling 200 shares)
You do the math
For 10,000 $ one can control 50,000 $ worth of stock
Or for 20,000 $ one can control 100,000 $ worth of stock.
More on Margin
SSF use margin. Daily, a variation margin is posted daily in the trading account.
“Marking to market”.
Futures value = Stock price + Interest – dividend.
E.g. MSFT 26.58 on close 9/9/05
Quote on One
MTH/ --- SESSION --- PT EST ---
- PRIOR DAY ----
STRIKE OPEN HIGH LOW LAST SETT CHGE VOL
SETT VOL INT
SEP05 26.66 26.80B 26.58A 26.60A ---- -3 3
26.63 31 102
OCT05 26.67 26.89B 26.67 26.69A ---- -3 1
DEC05 26.83 26.94B 26.75A 26.75A ---- -2 1
26.77 7 99
MAR06 ---- 27.13B 26.92A 26.92A ---- -5
TOTAL EST. VOL
VOL OPEN INT.
This does not include the Bid ask spread which is about 25 cents – 50 cents.
Trading tends to be concentrated in the front month because traders follow liquidity.
Rollover is common and “cheap” for traders who want to maintain a position for more
than a few months.
One has to be right about direction and time.
Narrower bid ask spreads.
People don’t like to go near individual stocks as it is too capital intensive.
Can sell short w/o the downtick rule.
Not detrimental to equity market .Arbitrageurs come in for their risk free profit when
stock market and Futures market are out of whack with each other.
Poised to become a powerhouse product in forthcoming years.
1) Buy a SSF if you think stock is going up.
2) Sell a SSF if you think the stock will go down
Remember that Margin is a two way street. (Usually not much fluctuation in account due
to 20 % requirement).
3) Covered calls (or Calendar spreads)
Instead of buying the underlying stock or call, you buy the SSF
Cheaper to buy SSF
Option premium (which you sell) remains unchanged
Safer than selling naked options
If price of stock decreases the SSF will have a greater percentage loss.
Buy SSF and sell call (Covered call)... trying to get time decay.
Sell SSF and sell put (? Covered put)
SSF do not have the Volatility / complicated price calculation associated with options.
Best done during relatively quiet sideways markets, when hopefully our long futures
position will not move particularly, but the option decays neatly as expiration nears.
4) Managing Capital exposures
E.g. A fund manager , with a portfolio of bonds wishes to orient himself more
towards the equity market, but doesn’t want to sell out of his cash bond holdings
before they mature in 3 months time. By using a modest amount of his cash float, he
can actually purchase the requisite SSF’s equivalent to his desired equity exposure,
while maintaining his substantial holdings of cash bonds. If he wants to reduce some
of his bond exposure, he could also sell Govt. Bond futures against his cash bond
5) Cash Flow Management
Fund managers and retail investors wish to make an investment but know that they may
not have the full capital to achieve it until a later period (for example, the following
month).He can buy SSF and have the exposure he requires before the full amount of the
capital reaches him thus maintaining a fully invested portfolio at all times and allows him
to interpolate his purchases ahead of time if he so desires.
The SSF revolution is in its infancy. Future markets are perceived in a bad light by the
vast majority of American investors and indeed a great bulk of US financial
SSF can and will grow; they require a massive education effort even with the professional
market players. There are many vested interests keen to see SSFs disappear.
SSF are still illiquid therefore institutions shy away from them as they need large
Traders can get in the ground floor and be in the best position to learn, adapt and
ultimately profit from this environment.
It is simple cheap and efficient ,and can become a pillar of the financial markets adding
liquidity and enhancing the depth of equity markets, providing Hugh profit opportunities
for speculators, offering multiplicity of strategies for investors of all shapes ands sizes ,
and being a product that helps make cash equity dealing better for every investor.
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