A single stock future (SSF) is a futures contract between two parties. The buyer of the SSF, or the "long" side of the contract, promises to pay a specified price for 100 shares of a single stock at a predetermined future date (the delivery date). The seller, who is on the "short" side of the contract, promises to deliver the stock at the specified price on the delivery date.
SSFs have existed since 2002 in the United States and have traded on the OneChicago exchange, a joint venture between the Chicago Mercantile Exchange (CME) and the Chicago Board Options Exchange (CBOE). OneChicago, however, closed in September 2020.
SSFs are also traded in several overseas financial markets, including those in India, Spain, and the United Kingdom. Currently, South Africa sports the world's largest SSF market, trading an average of 700,000 contracts daily.
- SSFs started trading in the United States in 2002 after the Commodity Futures Modernization Act (CFMA) of 2000.
- OneChicago, a joint venture between CME and CBOE, was the only exchange to list SSFs in the U.S., but it closed in 2020.
- Like other futures contracts, SSFs can be used to hedge or speculate.
- Each contract represents the right to buy or sell 100 shares of the underlying stock.
- There is a notable lack of trading activity and liquidity in the SSF market.
In the 1980s, SSFs were banned simply because the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) couldn't come to an agreement on which regulatory body would have authority over the practice.
However, in 2000, President Bill Clinton signed the Commodity Futures Modernization Act (CFMA). Under the new law, the SEC and the CFMA worked on a jurisdiction-sharing plan, and SSFs began trading on November 8, 2002.
The Single Stock Futures Contract
Each SSF contract is standardized and includes the following features:
- Contract size: 100 shares of the underlying stock
- Expiration cycle: Generally quarterly (March, June, September, and December)
- Minimum price fluctuation: 1 cent X 100 shares = $1
- Last trading day: Third Friday of the expiration month
- Margin Requirement: Generally 20% of the stock's cash value
The contract terms call for delivery of shares of the stock by the seller at a specified future time, known as the expiration date. However, most contracts are closed before expiration. To get out of an open long position, the investor simply takes an offsetting short position.
Conversely, if an investor has sold a contract and wishes to close it out, buying the contract will offset or close it out.
Making Sense of Margin
In an SSF contract, the margin deposit is more of a good faith deposit, which the brokerage firm holds toward the contract settlement. The margin requirement in an SSF applies to both buyers and sellers.
The 20% requirement represents the initial and maintenance requirement. In an SSF contract, the buyer (long) has not borrowed money and pays no interest. At the same time, the seller (short) has not borrowed stock. The margin requirement for both is the same. The 20% is a federally mandated percentage, but the individual brokerage house can require additional funds.
The margin requirement for SSFs is continuous. Each business day, the broker will calculate the margin requirement for each position. The investor is required to post additional margin funds if the account does not meet the minimum margin requirement.
Suppose an investor is bullish on stock Y. They purchase a single September SSF contract on stock Y at $30. Over the following week, stock Y climbs to $36. At that point, the investor decides to sell the contract at $36 to offset the existing (open) long position. The total profit on the trade is $600 ($6 x 100 shares).
This example is straightforward, but let's examine the trade closely.
The initial margin requirement was only $600 ($30 x 100 = $3,000 x 20% = $600). So the investor earned a 100% return on the margin deposit, illustrating the significant amount of leverage used in SSF trading. Of course, leverage works both ways, which could make SSFs particularly risky.
Let's look at another example, where the investor is bearish on stock Z. They decide to sell an August SSF contract on stock Z at $60. Stock Z performs as the investor had guessed and drops to $50 in July. The investor offsets the short position by buying an August SSF at $50. This represents a total profit of $1,000 on the trade ($10 x 100 shares).
Again, let's examine the investor's return on the initial deposit. The total profit clocked in at $1,000 on an initial margin requirement of $1,200 ($60 x 100 = $6,000 x 20% = $1,200). That translates to a handsome return of 83%.
An overview of SSFs wouldn't be complete without mentioning the use of these contracts to hedge a stock position. To hedge a long position in a stock, an investor simply needs to sell an SSF contract on that very same stock. If the stock falls in price, gains in the SSF will work to offset the losses in the underlying stock.
However, this is only a temporary solution because the SSF will expire.
Let's consider an investor who bought 100 shares of stock N at $30. In July, the stock is trading at $35. The investor is happy with the unrealized gain of $5 per share, but is concerned that the gain could be wiped out in one bad day. The investor wishes to keep the stock at least until September, though, in order to receive an upcoming dividend payment.
To hedge the long position, the investor sells a $35 September SSF contract. Whether the stock rises or falls, the investor has locked in the $5-per-share gain. In August, the investor sells the stock at the market price and buys back the SSF contract.
|September Price||Value of 100 Shares||Gain or Loss on SSF||Net Value|
Figure 1 . Tracking the Gains/Losses on Single Stock Futures
Until the SSF expires in September, the investor will have a net value of the hedged position of $3,500. The downside? In the case that the stock dramatically increases, the investor is still locked in at $35 per share.
SSFs vs. Stock Trading
Compared to trading stocks directly, SSFs provide a few advantages:
- Leverage: Compared to buying stock on margin, investing in SSFs is less costly. An investor can use leverage to control more stock with a smaller cash outlay. The margin on a stock is typically 50%.
- Ease of shorting: Taking a short position in SSFs is simpler, can be less costly, and may be executed at any time (there are no uptick rules).
- Flexibility: SSF investors can use the instruments to speculate, hedge, or create spread strategies.
SSFs also have disadvantages. These include:
- Risk: An investor who is long on a stock can only lose what has been invested. In an SSF contract, there is the risk of losing significantly more than the initial investment (margin deposit).
- No stockholder privileges: The SSF owner has no voting rights and no rights to dividends.
- Required vigilance: SSFs are investments that require investors to monitor their positions more closely than many would like to do. Because SSF accounts are marked to the market every business day, there is the possibility that the brokerage firm might issue a margin call, requiring the investor to decide whether to deposit additional funds or to quickly close the position.
While some traders had high hopes for SSFs when OneChicago was launched in 2002, the contracts have never really caught on with investors. Consequently, we see a lack of trading activity in the market today.
Comparison with Equity Options
Investing in SSFs differs from investing in equity options contracts in a few key ways:
- Long options position: The investor has the right, but not the obligation, to purchase or deliver stock when in a long call or long put position, respectively. In a long SSF position, the investor is obligated to deliver the stock.
- Movement of the market: Options traders use a mathematical factor, the delta, that measures the relationship between the options premium and the underlying stock price. At times, an option contract's value may fluctuate independently of the stock price. By contrast, the SSF contract will much more closely follow the underlying stock's movement.
- The price of investing: When an options investor takes a long position, they pay a premium for the contract. The premium is often called a wasting asset and will lose value over time. Then, at expiration, unless the options contract is in the money, it is worthless and the investor has lost the entire premium. (However, like single stock futures, options can be closed before expiration.) SSFs require an initial margin deposit and a specific cash maintenance level.
The Bottom Line
SSFs offer flexibility, greater leverage, and short-taking when compared to simply trading in the underlying stock. However, potential investors in SSFs should carefully examine the risk/reward profile of these instruments and make sure they're suitable for their personal objectives.
SSFs have not caught the fancy of traders compared to some other futures contracts, like those associated with crude oil, gold, or the S&P 500 Index. The lack of SSF trading makes them a lot less liquid than the actual stocks that they represent.