Single stock futures are not as well-known as other types of derivative products in the market. These products offer traders the ability to bet on the future price movement of a specific stock, while being able to minimize the capital requirements in participating in such opportunities.

While there are a good deal of advantages to using single stock futures, there are also some disadvantages that prospective investors should know about. We will shed a light on this and address and other topics related to single stock futures.

What Are Single Stock Futures?

A single stock future, which is commonly referred to as an SSF, is a futures contract wherein the underlying security is an individual stock. Similar to an options contract, each single stock futures contract consists of 100 shares of underlying stock. One of the primary benefits of trading in single stock futures is that it provides for a high level of leverage compared to individual stock trading.

Single stock futures began trading in the United States in 2002, and the National Futures Association is tasked with regulating all aspects of this futures contract. Within the SSF contract, the holder must take delivery of the shares of stock upon expiration. And the seller of the SSF contract must deliver those shares of stock to the holder. Essentially, the SSF is a contract between two parties wherein the buyer, holder will pay a specified price in the future, and the seller has the obligation to deliver these contracted shares.

Single stock futures makes short selling a stock more feasible than can typically be done with an individual stock in the traditional sense. Moreover, large hedge funds and other institutional traders can hedge their positions more efficiently using single stock futures.

Rather than having to hedge a long portfolio using broad market indices, single stock futures offers more targeted hedging capabilities for those investors and money managers who require more flexibility in their hedging operations.

Over the years, single stock futures have become increasingly popular in the global marketplace, particularly in certain parts of the European market and the Far East market. And although the United States has a sizable share of the single stock futures market, the interest in them has been on the decline over the last decade or so.

The Chicago Mercantile Exchange, or CME Group, along with the Options Clearing Corporation, OCC, are responsible for clearing trades in these instruments. Traders can access SSFs via their broker through the Globex or CBOE Direct platforms. Additionally, you should be able to retrieve the single stock futures list directly from your broker.

Single Stock Futures Contract Specs

Let’s now take a closer look at the standardized SSF contract. The SSF contract controls 100 shares of the underlying stock. There are a total of four expiration months for SSF contracts.

This includes the quarterly expirations ending March, June, September, and December. The minimum price fluctuation is one dollar, calculated as one penny multiplied by 100 shares of the stock. As for the trading hours for SSFs, they are traded weekdays between the hours of 8:15 AM and 3 PM Central Standard Time.

SSF contracts are utilized for both speculative and hedging purposes. In most cases, speculative traders will not hold on to these contracts up to the expiration date. Instead speculators use them as vehicles for amplifying potential returns on a stock position and they will typically be liquidated well before the expiration.

Although the SSF futures contract is between two investors, there are a total of three parties involved in SSF transactions. This includes the holder, or person long the SSF contract, the seller or person short the SSF contract, and the clearinghouse. And as we mentioned earlier The clearinghouse for SSF contracts in the case of those listed on the US exchanges are the OCC or CME.

The clearinghouse acts as the intermediary party that fully guarantees these trading products. In other words, they guarantee and insure against any risk of default. Essentially, the clearinghouse is responsible for the payment debit and credit of all these SSF contracts. This arrangement is what provides for confidence in trading within a centralized market such as the futures market. The clearinghouse uses what is referred to as a mark to market system for tracking the daily wins or loses within your brokerage account.

Buying and Selling Single Stock Futures

Single stock futures contracts will mimic the performance of the underlying stock with a few exceptions. More specifically, a long SSF contract will be equivalent to the stock’s traded price less any dividends scheduled to be paid prior to expiration. Along the same lines, a short SSF contract will be equivalent to the stock’s traded price less any dividends scheduled to be paid prior to expiration.

Single stock futures can be bought and sold at any time prior to its expiration, and are often traded as leveraged products. That is to say that since brokers will typically require only about 20% of the notional value as a margin requirement, a trader or investor can often amplify their profit or loss up to a factor of five. Although this type of leverage facility is available for SSF traders, it’s highly recommended that traders limit their leverage as much as possible.

It’s important to note that the standard 20% margin requirement for SSF contracts apply to both initial and maintenance margin. Initial margin refers to the margin required to enter a new position, while a maintenance margin refers to the margin required to maintain the position. In many commodity futures markets the initial and maintenance margin requirements vary. But as far as SSF contracts are concerned, these requirements are the same for now.

Additionally, as we noted earlier, selling stock short can sometimes be very challenging due to certain requirements such as the uptick rule and the need for your broker to actually accommodate you by allowing you to borrow the stock before you can actually short in the equities market. The uptick rule in stocks requires that a trader must wait for an uptick in price before they can be executed on their short position.

As such, SSF futures contracts are much more flexible and traders can easily go long or short with relative ease.

Let’s look at an example of how margin requirements work when you trade single stock futures contracts.

Let’s assume that an SSF contract for Apple stock is priced at $300. As such the notional value would be $300 times 100 shares of the stock which equals $30,000. Based on the 20% initial margin requirement, you would need $6000 of capital in margin as collateral to enter into a long or short position in an Apple single stock future contract. Let’s now assume that you take a long position in this SSF. After holding the position for a few weeks, but prior to expiration, the Apple SSF is trading at $310. As such, you decide to close the position by offsetting your by with a sell order.

In this case, you realize a $10 per contract profit on your position. This is equivalent to $1000 profit on the overall trade. This is calculated as $10 per contract times 100 shares of stock which is equal to $1000. This amount is therefore credited to your brokerage account, while the seller’s account would be debited by $1000 in their brokerage account.

What about another example using single stock futures? This time we will assume that SSF contract for Microsoft stock is priced at $70. As such, the notional value would be $70 times 100 shares of Microsoft stock which is equivalent to $7000. We know that the initial margin requirement is computed to be 20% of the notional value amount. Thus to participate in this SSF trade, you would need $1400 to be put up as margin. This is calculated by simply taking 20% of the notional value of $7000 to arrive at $1400.

In this case, we will go short Microsoft SSF contract at $70. If after a week or so passes, and before the expiration date, the Microsoft SSF contract is trading at $75, then what will that mean for our position? Well we know that there is a five dollar per contract open loss on this trade. This translates to a total dollar loss of $500, which is calculated by multiplying the five dollar per contract loss by the 100 shares within a standardized contract. As such, we decide to close out the position by buying back one contract of Microsoft SSF. By doing so, we will have realized the $500 loss which will be debited from our brokerage account.

Pros and Cons of Single Stock Futures

Now that we have detailed what single stock futures are and the mechanics of buying and selling them, let’s now discuss some of the major benefits along with some of the drawbacks of SSFs as a trading vehicle.

Below you will find a few of the main benefits of using SSFs:

Efficient For Short Selling – As we’ve touched upon earlier, selling stock short can be challenging and burdensome. You will often be limited by the uptick rule, and/or be dependent upon your broker’s ability to borrow the necessary shares that you need for your short position.

Alternatively with SSFs, since they are stock derivatives products, you can go short just as easily as you can go long a position. This makes SSFs very attractive for swing traders who actively trade both sides of the market.

Enhanced Leverage – With traditional stock margin accounts, you are able to achieve a maximum of two to one leverage on your position. If your broker provides you portfolio margin, then you may be able to achieve an even higher leverage within your trading account. But even this will be limited to about four to one or so.

In either of these cases, you will pay interest on the borrowed funds in your margin account. This amount will vary depending on your broker’s margin borrowing rates. With SSFs, you can achieve up to a five to one leverage on your position without incurring additional costs for that privilege. This is because futures brokers will typically require only a 20% margin to enter into a SSF position, and there are no interest costs associated with it.

Targeted Hedging Capabilities – Traders and investors that have exposure in a long only stock portfolio may find it difficult to efficiently hedge their portfolio. Most times, these individuals will seek to hedge any individual stock exposure by utilizing an inverse equity ETF, or buying puts on the stock within the options market.

Although both of these methods are acceptable ways to hedge a long equity portfolio, SSFs provide a better more targeted approach. With single stock futures, a trader can pinpoint the individual stock or stocks that they are most interested in getting protection for, and consider shorting those related SSFs to accomplish their hedging requirements.

Now let’s take a look at some of the drawbacks of single stock futures.

Lower Liquidity – Individual stock futures are typically much less liquid then their underlying stock. As such, the bid ask spreads can be wide in many single stock futures which can add to the transaction costs associated with trading these products.

Additionally, due to the lower volume and liquidity in these products, you can experience a large amount of slippage, particularly when an unexpected event triggers one-sided trading in that particular stock. As such, getting out of a position under such circumstances can be a costly affair. To avoid such occurrences, its best to stick with trading the most active single stock futures available.

Large Potential Losses – Due to the characteristics of derivatives products such as SSFs, a trader can lose the initial margin requirement and even more than the amount in their trading account. This is because the unlimited risk component of futures trading. If however you had invested in purchasing the stock directly, the maximum that you can stand to lose is your original investment, in the case of the company going bankrupt or losing its entire market value.

Not Well Suited For Amateurs – Most investors have learned about the markets through traditional stock investing. These individuals are typically not market professionals who have a great deal of in-depth knowledge about the different rules, regulations, and best practices as it relates to derivatives trading.

Derivatives trading requires a great deal of attention to detail and a robust risk management model to keep a lid on the adverse effects of leverage. As such, SSF and other similar futures products may not be best suited for those that lack the necessary expertise in managing them effectively.

Summary

US single stock futures have been around since the early 2000’s. They offer some advantages for those traders and investors speculating on a particular stock, and are seeking an increased level of leverage in the process.

Additionally, single stock futures are also popular among larger investment funds and institutions seeking to hedge specific positions within their portfolios.

Those interested in trading single stock futures should know that there are also some disadvantages associated with them. The most important of which is that they can contribute to a larger than expected loss particularly when the order flow in that instrument becomes lopsided.

Every trader should understand these risks and others associated with similar derivatives products before committing their hard-earned capital in the market. If you decide SSFs meet your risk tolerance, then you can sign up with one of the single stock futures brokers in your jurisdiction.