The most basic
use of single-stock futures is speculation.
For example, if
you believe that Microsoft will increase in
price in the near term, you could buy one contract
of Microsoft (100 shares) for delivery in three
months. If the price of Microsoft increases,
you can sell one contract of Microsoft (100
shares) and make a profit.
Conversely, if
you think Microsoft will decrease in price in
the near term, you can sell one contract of
Microsoft (100 shares) for delivery in three
months. If the price decreases, you can buy
one contract of Microsoft (100 shares) and make
a profit.
Of course, the
price of a Microsoft contract can increase or
decrease, creating a profit or loss.
Back to top |
Hedging
Another use of
single-stock futures is hedging.
For example, if
you have a portfolio that includes a pharmaceutical
firm that has released information you believe
will negatively impact the stock in the short
term, but won't have a lasting impact; you could
sell a single-stock futures contract on the
pharmaceutical stock as a hedge. If the stock
itself does decline, you will lose money on
your stock position but you will make money
on your futures position.
Also, if you owned
an index and a particular stock or sector was
under pressure and negatively impacting the
index you could sell individual futures contracts
to hedge your position.
Back to top |
Index
Balancing
Another use of
single-stock futures involving an index is index
balancing.
Additions and
subtractions to indices can create a temporary
imbalance. Many investors must sell a particular
stock that is being removed from the index and
must buy the stock that is being added to the
index. Single-stock futures of these particular
companies can smooth out some of these imbalances.
Back to top |
Spreading
Another use of
single-stock futures is spreading. Spreading
is the purchase and sale of like companies.
Back to top |
Short
Selling
Another use of
single-stock futures is short selling.
If a stock trader
wishes to sell the stock short, he must first
have the shares to sell. This is typically done,
by borrowing the shares from the firm's stock
loan department. There is a charge for borrowing
shares and interest can be earned on the proceeds
from the sale. There are also two other factors
to consider, the seller is liable for dividend
payments and the total quantity of shares sold
by sellers cannot exceed available shares outstanding.
Finally, to establish a short position customers
are held to the "up-tick" rule.
Back to top |
Alternative
to Options
Another use of
single-stock futures is alternative to options.
When trading options
on individual stocks, there are certain trading
aspects that must be considered. For example,
the month, strike price, and time premium involved.
If you were interested in using options to create
a synthetic futures position, you would have
to do two transactions (creating a commission
for each trade). Also if the stock prices were
in the money, the bid/offer spread would be
under, due to less liquidity. A single-stock
futures trade involves one transaction, pick
the month, and execute the trade.
When trading a
single-stock future, there is an obligation
to deliver shares or cash (if cash settled)
value. The seller of a futures contact receives
no proceeds from the transaction and no obligation
to pay dividends. There is no limit on total
short open interest and there is no up tick
rule in futures.
It should be noted
that all the above uses of single-stock futures
presume that the single-stock future's fair
value price is based on the cost of carry model,
the price should reflect the dividend and the
cost of financing the stock.
Back to top |
Regulatory
Updates
The Commodity
Futures Modernization Act of 2000 ("CFMA"),
signed into law by Congress on December 21,
2000, lifted the 19-year ban on the trading
by U.S. customers of futures contracts on individual
securities, as well as narrow based stock index
futures.
Unlike stocks
or futures individually, the CFMA granted dual
regulatory jurisdiction over SSFs to both the
Commodity Futures Trading Commission ("CFTC")
and the Securities and Exchange Commission ("SEC").
These agencies have delegated certain oversight
responsibilities to their respective Self-Regulatory
Organizations, the National Futures Association
("NFA") and National Association of
Securities Dealers Regulation, Inc. ("NASDR").
To this end, NFA has published a summary entitled
"Single Stock futures Regulatory Update":
In addition, the
NFA's Chairman has issued a letter describing
its responsibilities.
Earlier this year,
three Chicago exchanges, the Chicago Board Options
Exchange ("CBOE"), the Chicago Mercantile
Exchange ("CME") and the Chicago Board
of Trade ("CBOT") announced a joint
venture to list SSFs. These three independent
exchanges include the world's largest stock
options exchange and the two largest futures
exchanges in the U.S. Details can be found in
the press release here and here.
In addition, the
NASDAQ and the London International Financial
Futures and Options Exchange ("LIFFE")
announced a joint venture, also to offer SSFs.
Their press release can be found here.
If the various
exchange and regulatory components are put in
place in a timely fashion, the CFMA allows SSFs
to be listed by August 21, 2001 for trading
on a principal-to-principal basis and by December
21, 2001 for other customers.
Back to top |
SINGLE
STOCK FUTURES REGULATORY UPDATES
Joint CFTC and
SEC Rulemakings
CFTC and SEC Final Rule: Method for Determining
Market Capitalization and Dollar Value of Average
Daily Trading Volume; Application of the Definition
of Narrow-Based Security Index.
SEC and CFTC issued
joint rules establishing the method for computing
whether an index is a narrow-based security
index or not a narrow-based security index (i.e.,
a broad-based security index). Futures on indexes
that are narrow-based are securities futures
products and regulated by both the CFTC and
SEC; broad-based indexes are regulated by the
CFTC. The order permits ADRs to underlie a security
future and be a component security of a narrow-based
security index underlying a security future.
Federal Register-
Final Rules: [66 Fed. Reg. 44489 (August 23,
2001)]
Download
PDF
Cash Settlements
and Trading Halts
CFTC and SEC proposed rules to ensure final
cash settlement of security futures reflect
opening prices of the underlying security and
that securities products are halted in coordination
with regulatory trading halts on the primary
listing market.
Download
PDF
Federal Register
- Proposed Rule: [66 Fed. Reg. 45903 (August
30, 2001)] Comments due September 30, 2001.
Download
PDF
Commodity Futures
Trading Commission-Final Rules
CFTC Final Rules Provide Notice-Designation
Procedures for Securities Exchanges that Plan
to Trade Single-Stock Futures.
CFTC regulations
that establish procedures whereby national securities
exchanges, national securities associations,
and alternative trading systems may be "notice-designated"
as contract markets in security futures products.
See
page
Federal Register
- Final Rules: [66 Fed. Reg. 44960 (August 27,
2001)]
Download
PDF
CFTC Notice Registration
as a FCM or IB for Certain Securities Brokers
or Dealers
See
page
CFTC regulations
which govern the information application process
for persons seeking registration in any of the
futures industry firm categories, including
FCM and IB. These amendments would provide for
notice registration as an FCM or IB, as applicable,
in the case of a broker or dealer (BD) registered
with the SEC that, among other things, limits
its involvement with commodity futures contracts
to security futures products.
Federal Register
- Final Rules: [66 Fed. Reg. 43080 (August 17,
2001)]
Download
PDF
Commodity Futures
Trading Commission-Proposed Rules
CFTC Proposed Regulation to Restrict Dual Trading
in Security Futures Products.
The proposed rule
would restrict dual trading by floor brokers
in security futures products.
Federal Register
- Proposed Rules: [66 Fed. Reg. 36218 (July
11, 2001)]
Download
PDF
CFTC Listing Standards
and Conditions for Security Futures.
Federal Register
- Proposed Rules: [66 Fed. Reg. 37932 (July
20, 2001)]
Download
PDF
CFTC SRO Rules
CFTC Approves NFA Rules on Single-Stock Futures.
See
page
See
page
CFTC Recognizes
New Joint Venture Exchange for Single-Stock
Futures
The CFTC granted contract market designation,
subject to certain conditions regarding final
specification of clearing and self-regulatory
arrangements, to Nasdaq Liffe Markets.
See
page
The Nasdaq-LIFFE
Futures Exchange Rules
Download
PDF
CFTC Orders
Order authorizing the NFA to process notice
registration filings as a FCM or IB for securities
brokers or dealers registered with the SEC for
security futures products.
Federal Register
- Final Rules: [66 Fed. Reg. 43227 (August 17,
2001)]
Download
PDF
Securities and
Exchange Commission - Final Rules
Registration of Broker-Dealers Pursuant to Section
15(b)(11) of the Securities Exchange Act of
1934.
The final rules
adopt new Form BD-N for a CFTC registrant to
file notice register as a broker-dealer and
provide an exemption from Exchange Act Section
15 (a)(1) to permit security futures product
broker-dealers to effect transactions on security
futures regardless of the market on which the
products are listed or traded.
Federal Register
- Final Rules: [66 Fed. Reg. 45138 (August 21,
2001)]
Download
PDF
Registration of
National Securities Exchanges Pursuant to Section
6(g) of the SEA of 1934 and Proposed Rule Changes
of National Securities Exchanges and Limited
Purpose National Securities Associations
Federal Register
- Final Rules: [66 Fed. Reg. 43721 (August 20,
2001)]
Download
PDF
Federal Register
- Proposed Rules: [66 Fed. Reg. 26978 (May 17,
2001)]
Download
PDF
Securities and
Exchange Commission - SRO Rules
SEC Publishes NASD Rule Change.
NASD proposed
rule changes establish record-keeping requirements
for ATS that trade security futures, rules for
ATS to record trades, and prohibitions during
trading hours.
Federal Register
- Seeking Comments: [66 Fed. Reg. 41076 (August
6, 2001)]
Download
PDF
SEC Grants Approval
of OCC Related to Security Futures
Order approves a comprehensive set of rule changes
under which OCC will be permitted to clear and
settle transactions on security futures.
Federal Register
- Final: [66 Fed. Reg. 45351 (August 28, 2001)]
Download
PDF
Securities and
Exchange Commission - Exemptive Orders
SEC Issues Exemptive Order to Permit Principal-to-Principal
Trading in Security Futures Products
See
text
SEC Notice: Order
Granting Temporary Exemption to Certain Persons
Engaging in Security Futures Product Transactions
See
page
SEC Notice: Order Granting Temporary Exemption
of Certain Futures Commission Merchants and
Introducing Brokers from the Registration Requirements
of Section 15(a) of the Securities Exchange
Act of 1934
See
page
Internal
Revenue Service
RS Notice of Solicitation
of comments Dealers in Security Futures Contracts
Request for Comments
Federal Register - Proposed Rules: [66 Fed.
Reg. 13836 (March 7, 2001)]
Download
PDF
Back to top |
Exchanges
Back to top |
FAQ
- Frequently Asked Questions
How
Do I Use Single-Stock Futures?
The most important questions you have are most
likely about how you can use single-stock futures
in your Investment portfolio.
What
are Single-Stock Futures?
Look here for questions concerning futures contracts
for single-stock futures, including contract
specifications, margin requirements and the
exchanges that offer them.
Are
SSFs better than trading stocks?
An advantage that single-stock futures have
over trading stocks is that you can sell without
waiting for an uptick. So, when the stock price
is dropping, you might be able to take a short
position in single-stock futures sooner than
if you wait for an uptick to sell the stock
itself.
Are
SSFs better than trading equity options?
Single-stock futures are more straightforward
than equity options, where you have to decide
which strike price to trade within each contract
month, a decision that may involve an analysis
of time premium. With futures, it's an easy
decision: Do you believe the price of the underlying
stock is going to higher or lower than the current
price indicated by a certain futures contract
when that contract expires? Buy futures if you
think the price will be higher. Sell futures
if you think the price will be lower.
How
big are SSF contracts?
Nothing has been determined at this time, but
we believe it is likely that each futures contract
will represent 100 shares of underlying stock.
That is the contract size used at LIFFE and
by the Chicago Board Options Exchange (CBOE)
for equity options.
What
hours will they trade?
Once again, no details are available yet. But,
we look for SSF trading hours to match those
of the U.S. stock market, i.e., 9:30 a.m.-4
p.m., New York time.
What
are the margin requirements?
As of early August, regulators had not yet established
margin requirements for single-stock futures.
Most observers expect margins to be near 20%
of the contract value. If so, margin would be
$2,000 for one contract that represents 100
shares of a $100 stock (contract value of $10,000).
How
is an SSF contract different from an equity
option contract?
When you buy or sell a single-stock futures
contract, you are obligated to fulfill the terms
of the contract upon its expiration (unless
you offset the position before then).
When you buy an
equity option contract, you have the right,
but not the obligation, to either buy or sell
100 shares of the underlying stock at the option's
strike price by the time the contract expires.
When you sell
an equity option contract, you are obligated
to either buy or sell 100 shares of the underlying
stock at the option's strike price at contract
expiration.
