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 underlying shares, single stock futures do not convey voting rights or dividends.
Unlike stock options, which give the holder the right but not obligation to deliver the underlying stock (exercise the contract), futures contracts confer both the right and obligation to do so.
- A single stock future is a contract between two investors in which the buyer agrees to pay a specified price at a future point, at which point the seller will deliver the stock.
- Each single stock future contract is standardized and typically controls 100 shares of stock.
- Trading in single stock futures is often used as a strategy in hedging equity positions.
- Single stock futures also allow for greater leverage and short-taking than trading in the underlying stock.
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 market offers 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, President Bill Clinton signed the Commodity Futures Modernization Act (CFMA) on Dec. 21, 2000.
Under the new law, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) worked on a jurisdiction-sharing plan, and single stock futures began trading at the end of 2002. Congress authorized the National Futures Association to act as the self-regulatory organization for the security futures markets.
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 S&P 500 or Value Line Composite Index. Because the portfolio rarely matched the construction of the index, any hedged positions 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 positive when they launched in the U.S., activity has faded over time. However, this kind of security continues to register global interest. Trading in Europe, which pre-dated that in the U.S., remains fairly active. In June 2020, the Singapore Exchange (SGX) announced the launch of its own single stock futures covering 10 stocks.
In 2017, SGX announced a plan to launch single stock futures for some of India's largest companies. The National Stock Exchange of India (NSE), which already traded single stock futures, asked the SGX to delay that launch, suggesting the market wasn't large enough for all the players.