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 controls 100 shares of stock. Unlike owning the actual underlying shares, single stock futures do not convey voting rights or dividends.
Unlike stock options, which give the holder the right but not the obligation to deliver the underlying stock (to exercise the contract), futures contracts confer both the right and obligation to do so.
Understanding Single Stock Futures (SSF)
Single stock futures, as with all standard futures contracts, give the holder the obligation to take delivery of shares of the underlying stock at the contract's expiration date. The seller of the contract has the obligation to deliver those shares.
The futures markets offer the ability to use very high leverage relative to cash or spot markets. Traders use futures to hedge or 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. However, on Dec. 21, 2000, President Bill Clinton signed the Commodity Futures Modernization Act (CFMA) of 2000. Under the new law, the Securities and Exchange Commission (SEC) and the CFMA worked on a jurisdiction-sharing plan, and single stock futures began trading in November 2002. Congress authorized the National Futures Association to act as the self-regulatory organization for the security futures markets.
- A single stock futures contract is a standard futures contract with an individual stock as its underlying security.
- Each contract typically controls 100 shares of stock.
- The intent of single stock futures is to aid in hedging equity positions.
- Single stock futures also allow for greater leverage and short-taking than trading in the underlying stock.
Risks and Benefits
The major benefit of single stock futures is the ability to construct a strategy focused on one individual company's stock. Previously, a portfolio manager, for example, would hedge with index futures, such as those based on the Standard & Poor's 500 or Value Line Composite Index. Because the portfolio rarely matched the construction of the index, any hedged were not perfect. Correlations may have been strong but not always strong enough.
Another benefit was the differences in requirements for margin and short selling. Futures streamlined and reduced costs when compared to 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. Also, trading volume on individual contracts was and remains far below that of index futures. That leads to larger bid / ask spreads and a less liquid marketplace.
While the reception for single stock futures was good as they launched in the U.S., activity faded over time. However, they continue to have global interest. Trading in Europe, which pre-dated that in the U.S., remains fairly active. In 2017, the Singapore Exchange (SGX) announced the launch of its own single stock futures. That the National Stock Exchange of India (NSE), which already traded single stock futures, asked the SGX to delay that launch suggests that the market is not large enough for all the players.