A futures contract is an agreement to purchase or sell a specific asset at the agreed-upon price at a specified time in the future. Futures contracts may be cash-settled or may require physical delivery of the underlying asset.
What are the intended uses of futures?
Futures were originally developed to discover fair prices for commodities and to help investors protect their investments. They can help investors manage their risks from exposure in the cash market and enable speculators attempt to profit from price movement.
What products are traded in the futures markets?
Futures are traded on a wide variety of assets, including commodities, financial instruments or other products.
What distinguishes futures from securities products?
Futures' characteristics make them extremely versatile tools that can be used in a variety of ways. They involve the trading of contracts or agreements; no physical product or security changes hands unless the contract is held until the delivery (expiration) date. Futures are highly leveraged and accessible to most investors. Short positions can be effected as easily as long positions: for example, no inventory is needed to transact a short sale, there are no price restrictions (you don't have to wait for an uptick), and the cost to initiate a short position is significantly lower.
Who participates in futures trading?
There are two main categories of participants: hedgers and speculators. In general, hedgers are commercial users or producers of the underlying asset who utilize the futures markets in an attempt to offset their risk from exposure in the cash market. Typically, speculators are those who are willing to take on that risk in the hope of profiting from price fluctuations.
What are Single Stock Futures ("SSFs")?
SSFs are futures contracts whose underlying instrument is an individual stock. Each futures contract represents 100 shares of the underlying stock.
Who are expected to be the main traders of SSFs?
Virtually any investor can use Single Stock Futures; however, initial interest is expected to be from trading firms, fund managers and professional investors. Once these products are listed and traded on U.S., exchanges, interest among individual investors is expected to increase.
How are SSFs useful to individual investors and traders?
Single Stock Futures increase the range of investment opportunities offered to private investors by enabling them to participate in opportunities presented by price fluctuations. They can be traded at a fraction of the cost of buying or selling the shares outright. Accordingly, SSFs can be a useful alternative for anyone who trades other equity and derivative products. As with all investments, it is essential that participants understand the nature of these instruments and their inherent risks.
How are prices of SSFs determined?
The price of an SSF contract is equal to the cost of buying the shares and holding them until the expiration of the futures contract. That is:
Current Share Price + Interest Costs - Dividends Received = Current Futures Price
What are some possible uses of SSFs?
SSFs can be used in a variety of ways and for a variety of purposes. Some general uses include:
Hedging -- Using SSFs to protect against adverse price movement in the underlying stock.
Speculating -- Using SSFs to take an outright position on your opinion of future price movement.
Portfolio or Index Balancing -- Using SSFs to effectively enter or exit positions when component stocks are added to or deleted from a stock index.
Leverage refers to the amount of capital or "margin" one must put up relative to the value of the underlying contract. The smaller the percentage, the more highly leveraged a contract is said to be.
In the securities markets, the margin required to sell short is typically 50% of the investment's value, plus interest on the credit (the other 50%) extended to the customer by the brokerage firm. In the futures markets, in contrast, margin is a good faith deposit usually representing only a small percentage of the value of the underlying asset. It's important to note that the more highly leveraged an investment is, the smaller the fluctuation in price that is required to effect a profit or loss and, therefore, the greater the risk involved in making the investment. Thus, it's important to closely monitor futures positions.
How do Single Stock Futures contracts compare to equity options contracts?
Both products are derivatives based on shares of individual stocks, but the costs, benefits, risks and obligations associated with futures and options are different. Single Stock Futures represent an obligation to deliver or receive the price differential of the contract from the establishment of the position to its offset. Their prices are intended to go up and down in accordance with the price of the underlying shares. Options represent the right, but not the obligation, to deliver or receive company shares during the life of the contract. As with SSFs, their prices fluctuate in line with the price of the underlying shares, but they are also influenced by additional factors, such as the historical or anticipated volatility in the price of the underlying shares.
Are SSF products fungible?
Initially, SSFs traded on different American exchanges are not expected to be fungible. That is to say, an SSF product purchased or sold on one exchange must be closed out with an offsetting transaction on that same exchange. For example, only the sale of a futures contract on XYZ Corporation at the CBOE exchange will offset a long XYZ futures contract originally purchased at the CBOE exchange. In time, this is expected to change.
What are some of the advantages of trading single stock futures as opposed to stocks?
The ease of selling Single Stock Futures enables stock owners to protect their investment against temporary adverse price movement without having to sell their shares.
In the case of short selling, futures margins tend to be more favorable and traders don't have to secure an inventory of the stock they're shorting. Furthermore, sellers needn't wait for an uptick for their transactions to be executed.
Also, SSFs will enable traders to attempt to profit from price fluctuations without having to buy or sell actual shares of stock.
How are SSFs settled?
SSFs in the U.S. require physical delivery of underlying shares.
Where are SSFs traded?
The Chicago Board Options Exchange (CBOE), the Chicago Mercantile Exchange (CME), and the Chicago Board of Trade (CBOT) have formed a joint venture to create a new electronic marketplace for the trading of SSFs. This joint venture is called OneChicago, LLC.
The American Stock Exchange (AMEX) has announced its intention to list and trade SSFs.
Island ECN, Inc. has announced a subsidiary, Island Futures, that will list and trades SSFs.
This short list of proposed SSF marketplaces will most likely grow, especially once the success of this new product has been established in the U.S.
What will be the trading hours of SSFs?
Presently, SSFs are traded through OneChicago, LLC from 8:15 a.m. - 3:00 p.m. Central Time.
Yes. Security futures products are not suitable for all investors. Futures trading involves substantial risk of financial loss and should be considered carefully before making any trades.
