If you've never heard of single-stock futures, or SSFs, don't worry -- you're not alone. Part of the relatively new world of securities futures, which includes contracts on individual stocks, exchange-traded funds and narrow-based indices, these issues are now nearly 2 years old but still are having trouble gaining a foothold among mainstream investors. While current volume and open-interest figures are admittedly uninspiring, they still showed a 60% year-over-year volume growth and are on a trajectory that is ahead of similar historical points of oil futures, euro/dollar trading and bond futures, all of which went on to become some of the most popular and successful trading products that exist. I think many people are prematurely dismissing the potential of single-stock futures in terms of growth, application and their ultimate place in the financial landscape. Part of the problem is due to the hybrid nature of the product itself: They're part equity and part commodity, with trading partially governed and cleared through the Options Clearing Corp. This puts the marketing of securities futures in a netherworld -- securities brokers don't quite understand or sometimes don't even offer futures trading, and commodity firms rarely pursue retail stock accounts. Educating both the providers and users will be crucial to the product's growth. "I liken this to cell phones. People are creatures of habit but at some point the advantages of a product will create a change in behavior and lead to broad usage," said Peter Borish, senior managing director at OneChicago, the leading securities futures exchange.
What They Are
Like 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.