What They AreLike an option, one single-stock futures contract represents 100 shares of the underlying stock. But unlike an option's price, which displays nonlinear behavior due to time and volatility, the price of an SSF will closely track the price of the underlying stock, eventually converging at expiration. SSF contracts have a finite lifespan. A transaction is an agreement between a buyer and seller to purchase or deliver those shares at the expiration date. Of course, positions can be closed out (sold or bought back) anytime prior to expiration. Expiration months run on a quarterly basis: March, June, September, December. Two quarterly and two front serial months will trade at all times for a total of four active expirations. Short-term interest rates, which affect the cost of carry, are what mostly determine the price of a single-stock futures contract. As the expiration date draws near, that cost nears zero. But don't confuse this with the time premium associated with an option's value. An option is an eroding asset and may expire worthless. A securities future always will expire with a value equal to the current cash market.
Cheaper, FasterBoth of the exchanges that offer SSFs, OneChicago and NQLX, are fully electronic and include futures on not only individual issues but broad ETFs and micro-sector funds. The price increments are in pennies and the bid/ask spreads are comparable to the cash stock market (and typically much narrower than the related options market). And as a new all-electronic exchange, there is no legacy of the specialist system -- the trading systems are both cheaper and more efficient. The first and most notable advantage over stocks is the added leverage provided by the lower margin and capital requirements. Initial margin requirements for stock futures are just 20% of the cash value of the contract, which is significantly below the 50% requirements for buying or shorting stocks in the cash market. For example, if you buy 100 shares of XYZ at $50, you'd have to put up $2,500. By contrast, buying one XYZ single-stock future would require just $1,000. This additional leverage can be applied to reduce the cost and yield higher returns. For example, you could create a covered-call position using stock futures. The call options sold will be done on a one-to-one basis with the futures contracts because they both represent 100 shares. Not only will your margin and capital requirements be lower, but the commission cost also may be lower due to the reduced number of contracts traded. Another important feature is that while stocks have a limited number of shares available to trade (the float), there is no limit on the number of futures contracts that can be made available. This means you'll never be unable to short shares. (In past articles I've talked about using options, specifically simultaneously buying a put and selling a call, to create a synthetic short position in issues with hard-to-borrow shares.) Borish believes the unlimited pool of available shares is a prime example of how stock futures can create a more efficient market. "Once SSFs are recognized and accepted as a seamless replacement for trading stocks, it will lead to a natural two-sided marketplace," he said. This should provide a nice release valve for hard-to-borrow stocks and help prevent short squeezes or other attempts to manipulate a stock's price. Also, SSFs are not bound by the uptick rule, meaning you can short into a declining price.