What Is a Single Stock Future?
A single stock futures (SSF) contract is a standard futures contract with an individual stock as its underlying security. Each contract typically provides for the delivery of 100 shares of the stock. Unlike the underlying shares, single stock futures do not convey voting rights or dividends.
In contrast with stock options, which give the holder the right but not obligation to buy or sell the underlying stock by exercising the contract, futures contracts that are not cash-settled obligate both parties to complete a transaction in the underlying instrument at expiration.
- Single stock futures are standardized contracts between buyers and sellers specifying the price for shares to be delivered at the contract's expiration.
- Both parties to a single stock futures contract take on an obligation, in contrast with the holders of stock options.
- Single stock futures provide more leverage than holdings of the underlying stock.
- Single stock futures are the least traded equity derivatives; they haven't been traded in the U.S. since 2020.
Understanding Single Stock Futures (SSF)
Single stock futures, as with all futures contracts that aren't cash-settled, require the buyer to take delivery of the underlying instrument at the contract's expiration. The seller of the contract has the obligation to deliver the same. In the case of single stock futures the underlying security is a particular stock, typically 100 shares per futures contract.
Traders use futures to hedge, or to speculate on the price movement of the underlying asset. For example, a producer of corn could use futures to lock in a certain price and reduce risk, or anybody could speculate on the price movement of corn by going long or short using futures.
Before the advent of single stock futures, stock market investors could only hedge their positions with options or index futures. The Commodity Futures Modernization Act (CFMA), passed in 2000, legalized trading in single-stock futures under the joint supervision of the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).
U.S. single stock futures trading began in 2002 and continued until 2020, when the last U.S. exchange to list single-stock futures closed.
Risks and Benefits
Traders use single stock futures to hedge a position in a stock or to make levered speculative bets on its price at a future date, much as with stock options. A portfolio manager hedging instead with index futures runs the risk of a mismatch between the composition of an index and that of the portfolio being hedged.
Like stock options, single stock futures allow leveraged speculation on a decline in the share price without engaging in short selling. Single stock futures streamlined and reduced costs when compared with comparable options strategies and individual stock short selling, respectively.
The risks are similar to other futures contracts in that leverage could amplify losses, as well as gains. While stock futures continue to trade on some exchanges outside the U,S., they remain the least traded equity derivatives. That leads to larger bid-ask spreads and a less liquid marketplace.
Single-stock futures global trading volume rose 42% in 2021 from 2020, to 4.82 billion contracts. Borsa Istanbul in Turkey was the 2021 volume leader with 1.7 billion contracts traded, followed by Korea Exchange with 1.2 billion.
National Stock Exchange of India was far and away the leader in the notional value of single stock futures traded at $2.85 trillion in 2021.