Very simply, Single Stock Futures are standardized contracts on shares of individual companies. These underlying shares are generally traded on at least one of the major stock exchanges of the United States.

Taking a long position in an SSF means committing yourself to take delivery of the underlying shares (or their value if cash settled) on a specific future date. When you do so, you are most likely expecting an increase in value of the underlying stock, as well as an increase in price of the futures contract. Purchasing a SSF contract at one price and closing out the contract by selling it later at a higher price will result in a profit. In other words, taking a long position in an SSF generally reflects a bullish market opinion on the underlying shares.

Taking a short position in an SSF means committing yourself to deliver shares (or their value if cash settled) on a specific future date. When you do so, you are most likely expecting a decrease in the value of the underlying stock, as well as a decrease in the price of the futures contract. Making an initial sale of an SSF at one price (i.e., going short) and later closing out the contract by purchasing it at a lower price will result in a profit. In other words, taking a short position in an SSF generally reflects a bearish market opinion on the underlying shares.

Though both SSFs and listed equity options are based on a company's shares, each product has a different set of costs and benefits. SSFs represent an obligation to make or take delivery of the contracts price differential on expiration. Their prices will go up and down in line with the underlying share price.

Any value in the future contract that is in excess of the value of the underlying shares generally reflects the cost of carrying the stock until the contract’s expiration. Such costs include interest rates and dividends paid by the underlying stock. For further examination of the effects of these costs, please refer to the SSF pricing calculator found in the Trading Strategies section of this site.

The purchase or sale of a SSF does not entail a predetermined amount of risk. In fact, the potential loss is always unlimited. As the value of the underlying stock continues to decrease (if you are long) or increase (if you are short), so does your margin requirement. If you still have a long position in an SSF when it expires, you will be obligated to take delivery of the underlying shares (or their value if cash settled) at the current cash market price. Conversely, if you still have a short position in an SSF when it expires, you will be obligated to deliver the underlying shares (or their value if cash settled) at the current cash market price.

Equity options, on the other hand, represent a right to purchase (in the case of a call option) or sell (in the case of a put option) underlying shares at a certain price, on or before the option’s expiration. The price at which an option is either initially purchased or sold most often reflects a premium over current market value of the underlying shares. However, in addition to the cost of carrying an equivalent number of underlying shares until the option’s expiration, this premium can represent the anticipated volatility in price of the underlying shares during the option’s lifetime. The measure of this anticipated volatility can be very subjective and change frequently, resulting in varying premium over current market value of the underlying shares.

The purchase of an equity option involves a predetermined risk. In other words, the potential loss is always limited to the total premium paid for the option. No matter how much the price of the underlying shares moves contrary to your opinion (i.e., bullish if you purchased a call option, or bearish if you purchased a put option), you can only lose this amount of money. In further contrast to futures, if you are still long an equity option contract when it expires, you are not obligated either to purchase or sell underlying shares if it is not profitable to do so. You can, however, lose as much as your total investment since equity options can expire with no market value (e.g., exactly at- or out-of-the-money.)

The initial sale (going short) of an equity option, however, does incur an obligation either to sell (in the case of a call) or purchase (in the case of a put) shares of the underlying stock. Such a sale does not entail a predetermined amount of risk (or potential loss). Rather, the loss potential is limited only by how much the price of the underlying shares moves contrary to your opinion. However, investors who sell equity options short (or “write” them) are entitled to keep the premium received from their initial sale. If you are still short an equity option at its expiration, any loss you incur will be partially off set by this premium amount.

Any investor contemplating the use of futures or equity options should become thoroughly familiar with the risks involved with the use of either financial instrument.