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.