Single stock futures (SSFs) are contracts between two investors. The buyer promises to pay a specified price for 100 shares of a single stock at a predetermined future point. The seller promises to deliver the stock at the specified price on the specified future date. The contracts have existed since 2002 in the United States and trade on the OneChicago exchange, a joint venture between the Chicago Mercantile Exchange (CME) and Chicago Board Options Exchange (CBOE).

History

Futures on individual equities, or single stock futures, traded in England and several other countries for some time but were prohibited in the United States because, in 1982, an agreement between the chairman of the U.S. Securities and Exchange Commission (SEC), John S.R. Shad, and Philip Johnson, chairman of the Commodity Futures Trading Commission (CFTC), banned the trading of futures on individual stocks. The Shad-Johnson Accord was ratified by Congress in the same year.

Key Takeaways

  • Single stock futures started trading in the United States in 2002 after the Commodity Futures Modernization Act (CFMA) of 2000.
  • OneChicago, which was a joint venture between CME and CBOE, is the only exchange to list single stock futures in the U.S. today.
  • 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.

Although the 1982 accord was originally intended to be a temporary measure, it lasted until Dec. 21, 2000, when President Bill Clinton signed the Commodity Futures Modernization Act (CFMA) of 2000. Under the new law, the SEC and the CFMA worked on a jurisdiction-sharing plan, and SSFs began trading in Nov. 2002.

Initially, SSFs began trading in two U.S. markets: OneChicago and the NQLX. In June 2003, however, Nasdaq transferred ownership of its stake in the NQLX to the London International Financial Futures and Options Exchange (LIFFE). Then, in Oct. 2004, the NQLX consolidated its contracts with those of OneChicago, leaving that organization as the primary trading market for SSFs.

The Single Stock Futures Contract

Each SSF contract is standardized and includes the following basic specifications:

  • Contract Size: 100 shares of the underlying stock
  • Expiration Cycle: Four quarterly expiration months - March, June, September, and December, plus two consecutive months that are the next two months but not quarterly expirations.
  • Tick Size: 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. However, most contracts are closed before expiration. To get out of an open long (buying) position, the investor simply takes an offsetting short position (sells). Conversely, if an investor has sold (short) a contract and wishes to close it out, buying (going long) the contract will offset or close it out.

Making Sense of Margin

When an investor has a long margin account in stock, they are borrowing part of the money to buy stock, using the stock as collateral. 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. Every 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.

For example, in an SSF contract on stock X priced at $40, both the buyer and seller have a margin requirement of 20% or $800 (or $40 x 100 shares x 20%). If stock X goes up to $42, the long contract account is credited with $200 ($42 - $40 = $2 x 100 = $200), and the seller's account is debited by the same $200. (Note: For simplicity, we'll be using one contract and the basic 20%. Commissions and transaction fees are not taken into account.)

Speculating

Suppose an investor is bullish on stock Y and goes long one September SSF contract on stock Y at $30. At some point in the near future, stock Y is trading at $36. At that point, the investor sells the contract at $36 to offset the existing (open) long position and makes a $600 profit on the position.

This example seems simple, but let's examine the trade closely. The investor's initial margin requirement was only $600 ($30 x 100 = $3,000 x 20% = $600). This investor had a 100% return on the margin deposit, which illustrates the leverage power of trading SSFs. Of course, had the market moved in the opposite direction, the investor can suffer losses exceeding the margin deposit.

In another example, an investor is bearish on stock Z and goes short 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 gross profit of $10 per share or a total of $1,000.

Again, let's examine the return the investor had on the initial deposit. The initial margin requirement was $1,200 ($60 x 100 = $6,000 x 20% = $1,200) and the gross profit was $1,000. The return on the investor's deposit is 83.33%.

Hedging

An overview of SSFs would not be complete without mentioning the use of these contracts to hedge a stock position. To hedge, an investor with a stock position takes the opposition position in single stock futures; gains in the SSF will offset losses in the stock if shares fall. 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, however, because of an upcoming dividend payment. To hedge, the investor sells a $35 September SSF contract. Whether the stock rises or declines, 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

$30

$3,000

+$500

$3,500

$35

$3,500

0

$3,500

$40

$4,000

-$500

$3,500

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 negative side of this is that if the stock dramatically increases, the investor is still locked in at $35 per share.

SSFs vs. Stock Trading

Compared to directly trading stocks, SSFs provide several major 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. Margin on 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.

Single stock futures also have disadvantages. These include:

  • Risk: An investor who is long in 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 close the position quickly.

While some traders had high hopes for SSFs when OneChicago was launched in 2002, the contracts have never really caught on with investors, and there is consequently a lack of trading activity in the market today. Trading hours are also limited: 9:30 a.m. to 5:30 p.m. ET.

Comparison with Equity Options

Investing in SSFs differs from investing in equity options contracts in several 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. 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). Single stock futures require an initial margin deposit and a specific cash maintenance level.

The Bottom Line

Investing in single stock futures offers some flexibility, leverage, and the possibility of innovative strategies for investors. However, potential investors in SSFs should carefully examine the risk/reward profile these instruments offer and be certain that they are suitable for their personal objectives. In addition, since single stock futures have not caught the fancy of traders compared to some other futures contracts—like crude oil, gold, or S&P 500 Index futures—the lack of trading activity makes them a lot less liquid than the actual stocks that they represent.