Single Stock Futures Explained

Gabe Velazquez

As if a standard futures contract — those that control an underlying commodity, stock index, currency, or interest rate instrument — weren’t esoteric enough for most, there are also contracts that control individual stocks. These are called single stock futures, or in their abbreviation (SSFs). In this article I’ll give readers a broad overview on this lesser known trading vehicle so that you are better informed as to whether it is the right asset class for you.

Although futures on individual stocks have been trading in other countries— primarily England, and South Africa — for quite some time, here in the United States they were banned until the year 2000.  So here in the States these contracts are fairly new as they have only been traded for about 13 years.

Single stocks futures work exactly like traditional futures in that they are an agreement between two parties, the buyer who promises to pay a specified price at a predefined date for an individual stock, and the seller who is obligated to deliver the stock with same stipulations.  The difference is that unlike traditional futures contracts that vary in quantity, and quality of the underlying asset, these contracts control a fixed 100 shares of the underlying stock regardless of the company being bought or sold.   Because of the lot size being 100 the minimum price movement (tick) is equal to $1.00.

In the US, all of the SSFs are traded on OneChicago,  a fully electronic exchange based in ( you guessed it) Chicago.  Currently, OneChicago lists over 85 single stock futures contracts on some of the biggest companies in the S&P 500. Names like IBM, Microsoft, Wal-Mart and Apple are just a few.  In addition, Exchange traded funds have been gradually added over the last few years.  Similar to traditional futures, these contracts expire on a quarterly basis for SSFs on ETFs with two additional serial months added in for stocks.

The margin on SSFs differs from mainstream futures contracts in that it is fixed at 20% of the cash value of the stock and is both the initial and maintenance margin.  Because the margin is fixed it is calculated everyday so one needs to monitor this very closely as a big gap in the underlying stock can dramatically change the margin requirements.   As an example, let’s say that you buy 1 SSF on Apple; the price of the stock is 465.00 a share.  In this instance, your margin requirement on this transaction would be $9300.00 ($ 465×100= $46,500×20%=$9300), and as I mentioned earlier this margin will change every day.

One of the advantages of SSFs over purchasing a stock outright is the leverage.  But as we know, leverage can cut both ways so make sure you use stops and only implement a low-risk strategy when trading SSFs.  In the earlier example, if we sold Apple for a profit, our rate of return over buying the stock outright would be more attractive because of the leverage. In addition, shorting SSFs is less cumbersome than individual stocks because there are no shares to borrow.

One important use of SSFs is in hedging, and because SSFs don’t have the time and volatility premiums of stock options they are a better hedging tool.  The only drawback is the dynamic margins which have to be monitored.

In conclusion, single stocks futures are flexible vehicles that can be used in lieu of stock to speculate, hedge, and are much easier to short than equities.  For information on symbols and expiration months please go to the OneChicago website here. And as always, please understand the risks involved in trading any product before you put even a penny at risk.

Until next time, I hope everyone has a great week.

This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.