A Primer to Trading Single Stock Futures
Single Stock Futures or SSFs are often overlooked by both stock and future traders. Combining the benefits of both stocks and futures into one traded product, traders should give SSFs serious consideration as an added tool for their portfolio. This article will cover the basics of SSFs in order to equip you with the knowledge to decide if these products may fit into your trading future.
SSFs began trading in the United States in late 2001 after Congress removed draconian legislation banning their use. They were trading in Europe for some time prior to this date. SSFs were initially traded on an exchange formed by a joint venture between the CME, CBOT, and CBOE. SSFs are now traded on the One Chicago Exchange, which remains a joint venture between the CME and CBOE.
A SSF is a futures contract that has 100 shares of a single stock as its underlying asset. An ETF SSF is equivalent to 1000 shares of the ETF stock.
As in most futures, there is an expiration date on SSFs which is the quarterly cycle of March, June, September and December. The month codes are H, M, U, and Z; in that order. Minimum price fluctuation is $0.01/share or $1.00 per contract tick. They trade from 8:30AM to 3:00PM, CST except the DIA ETF contract which closes trading at 3:15PM, CST. SSFs are available on hundreds of well known stocks including all the stocks in the Dow Jones Industrial Average and many stocks in the S&P 500.
Now that we have a basic understanding of the mechanics of SSFs, why trade them? What are the advantages and disadvantages?
The number one advantage of the SSF is financing. It only takes a 20% margin to trade an SSF to control 100 shares of stock. They typically track the underlying stock or ETF tick for tick so most traders will be able to see the leverage advantage of SSFs over the stock itself. SSFs are generally priced higher than a share of stock since the carry price (interest) is included in the price of the SSF for the future expiration date. This fact makes SSFs very cost efficient unlike buying the stock on margin where the interest rate is variable and determined by the broker without competition and is subject to marketplace volatility. I can hear some of you asking, why not just trade options? Well, there is an important reason why SSFs have an advantage over options and that is with SSFs you don’t pay a volatility premium and there is no time decay. SSFs settle to physical delivery and never expire worthless unlike options and there is no early exercise.
The primary disadvantage to SSFs is their lack of volume. For example the heaviest volume SSF on the One Chicago Exchange right now is Bristol Myers contract BMY1C which has an open interest of 11,030. Volume drops precipitously from there on the other SSFs offered. Hopefully, over time, the volume issue will be resolved when more traders discover the benefits of SSFs.
Good Luck!
Dave Goodboy is Vice President of Marketing for a New York City based multi-strategy fund.