David Floyd's SSF Watch, Part 1

To All TM Members: Dave Floyd is a successful daytrader who sees tremendous opportunity in SSFs. In his new four-part series, David Floyd's SSF Watch, he will explain to you the tremendous advantages of SSFs and why he is gearing himself up to trade them once they go live (and why you should too). In addition, he will teach you all the important mechanics of futures trading and most viable strategies to consider applying to SSFs.

Why I am going to trade Single Stock Futures (SSFs)?

Given that my background since 1994 has been trading stocks professionally, many of you may ask why the switch to futures? First off, I am not abandoning stocks. SSFs will merely complement my existing approach to trading. My style would be described by some to be incredibly intense and perhaps just a bit too short-term in nature. However, I firmly believe that the short duration of my average trade (less than 5 minutes) offers me the best possible risk/reward relationship. While it is no surprise over the last year or so that volatility intraday has been compressed, the diligent and focused trader can still navigate these unfamiliar waters. After giving you this introduction to SSFs this week, I will show you in my forthcoming series of articles why I am looking to adapt my trading style to SSFs when they go live in the next couple of months or so. I will also show you how you too can take advantage of SSFs, whether you trade intraday or some other short-term time frame.

So what are SSFs?

A SSF contact is simply a standardized agreement between two parties to buy or sell 100 shares of a particular stock in the future at a price determined today. Futures contracts are bought and sold on federally regulated exchanges, and for SSFs, regulation is by both the Securities and Exchange Commission and the Commodity Futures Trading Commission.

The Mechanics of SSFs

The mechanics of trading SSFs are fairly straightforward. If you believe that the price of a particular stock will go up, you buy or "go long" a SSF contract. If you think the price is headed down, you sell or "go short" the futures contract (and in futures trading, you don't have to wait for an uptick as you might have to when shorting stocks, so going short is as easy as going long). I'll go into much more detail on this in the coming weeks.

The Upside Of SSFs for Stock Traders Like You And Me

The advent of SSFs has the potential to re-introduce some of that sorely needed volatility. First and foremost, it will introduce a completely new trading arena. That alone will create substantial opportunities and volatility. Secondly, the increased leverage afforded by SSFs will offer a nimble and proficient trader excellent potential, while tying up less capital intraday.

Not since the introduction of the QQQs has there been so much "buzz" surrounding the launch of a new trading product. The SSFs are sure to change the trading landscape forever. They will not only be a product that can be traded exclusively, but they will be a wonderful complement to what I already do as an intraday stock trader (HVT). The second aspect is what I find most intriguing.

Given that my current approach to the market involves keying my trades off of the S&P 500 or Nasdaq futures, it only seems logical that the individual stock futures will also be an excellent resource for keying trades on the underlying stocks.

Additionally, they do not require upticks in order to get short, less capital is required (20%), and you can begin to see why these products will be very desirable.

The one aspect that still remains unanswered, although history is an excellent guide, will be the inefficiencies in the way they are traded. More than likely, the following traits will be evident:

1. Large spreads

2. Futures trading far above or below fair value

3. Exaggerated moves relative to underlying market movement

I recall fondly back during the time after the QQQs were launched that the intraday moves were just wild. While there was a higher degree of risk associated with trading them at the time vs. another stock, the rewards more than compensated for it. Will the SSFs follow a similar pattern? I am betting on it. The bottom line is that nobody knows for sure how it will all play out, but opportunities will exist for those who quickly adapt to this new marketplace.

I have been asked quite a bit recently whether or not I will abandon my current individual stock trading, once the SSFs roll out? The answer is no. The introduction of SSFs is a tremendous complement to my existing approach. There will be arbitrage opportunities, etc.

In my future pieces, scheduled for March 26, 28 and April 3, I will discuss the structure of the SSF marketplace, contract specifications and the strategies that I will likely employ.

To see Part 2 of Dave Floyd's SSF Watch, please click here. To jump ahead to Part 3, please click here.