Advantages
Selling
A Stock Short
One plus is the ease
and diminished expense of taking a short position in a
single stock. Selling a stock short in the stock
market is relatively complicated and expensive. A
short sale in a stock necessitates locating the shares
to borrow and paying the broker loan rate of interest.
You must then wait for an uptick to sell the stock
short. Waiting for an uptick to sell a stock short in
a declining market can be frustrating and costly. By
the time a particular stock upticks, it could be
substantially below the price at which you wanted it
sold. However, in the futures market with the SSF
contract, you can sell a stock short just as easily as
you can buy one. When you sell a stock short using an
SSF contract, you don’t have to wait for an uptick.
You can sell when you want, without going to the
trouble of finding the stock and without the expense
of paying the broker loan rate of interest on the
shares borrowed.
Risk
Management
Selling
SSF contracts can also greatly contribute to risk
management in an investor’s portfolio with possible
tax benefits. Instead of selling specific stocks in
one’s portfolio during market downturns, an investor
could sell an equal amount of shares in SSF as a hedge
against his or her stock position. The ability to
hedge a particular stock facilitates holding onto the
underlying position in the stock market for longer
periods of time, thereby potentially providing
investors substantial tax savings in long-term versus
short-term gains.
Speculation
An
investor without owning any stock could use SSF to
speculate outright on an anticipated increase or
decrease in the price of a stock.
Margins
One major difference
between stocks and futures centers on the role of
margins. For stocks, margins, which are set by the
Federal Reserve's
Regulation T, have been at 50% for retail investors
and 15% for dealers
since 1974. A stock investor buying on margin borrows
the difference, and
can either pay the loan down, or offset it when the
security is sold.
Futures margins, which are set by the exchange, don't
represent a down
payment on an asset -- but are rather a performance
bond from the investor
to the exchange clearinghouse. Margins vary quite
widely as a percentage of
the underlying asset, but generally are quite low. For
example, the
underlying value of the S&P 500 future is hovering
around $335,000, but the
initial margin for a speculator is only $23,438, or
less than 7%.
The futures investor doesn't have to pay interest on
the remaining 93%;
indeed, futures investors can deposit T-bills and earn
interest on 90% of
the deposit with a 10% haircut in their margin
accounts.
Cost
Advantage
SSF
are traded in 100-share blocks, virtually mirroring
the price movement in the single stock on which the
futures contract is based. A $1 move in an individual
stock equals $100 in an SSF contract. There is a big
cost advantage here. In order to control shares in a
stock, you need to post at least 50% margin and pay
interest on the balance. In SSF, all that is required
is approximately 20%, or less than half the margin
required in the stock market. Additionally, there is
no interest charge on buying or selling a stock on
margin in SSF. Essentially, you will earn or lose the
same in an SSF contract as you would when buying 100
shares of stock.
Commission
Savings
In all probability, the
transaction costs in buying or selling a SSF contract
amounts to less than buying or selling the same 100
shares of stock in the stock market.
Spread
Differentials
SSF
offers investors additional investment strategies. For
example, if an investor feels the price of one stock
will decline or rise in relation to another stock he
or she can buy a SSF contract on one stock and sell a
SSF contract on another, hoping to profit from the
spread differential between the two stocks anytime up
to the contact’s expiration.
No
Clearing Fees on Foreign Markets
Investor can also gain
cross border exposure without the expense of going
through foreign clearing systems. Will circumvent many
of the difficulties faced by investors attempting to
trade across jurisdictional boundaries by providing
access to UK, European and US shares on a single
trading platform.
Universal
Stock futures transactions will be clear of costs of
accessing settlement systems across international
borders
Greater
Versatility
SSF allows a trader to
potentially profit no matter what direction the market
moves. If a trader is of the opinion that the stock
market is going to fall, a trader can sell a contract.
A profit will be made if the trader then buys that
contract back later when the price decreases. This
avoids the hassle of stock borrowing.
Electronic Trading
Platforms
SSF
will are traded on electronic trading platforms
available to the public through the internet.
Investors will have universal access to the same
sources of information, delivery, and speed of
execution that only a few years ago were available
primarily to professionals. Price fills are routinely
provided in seconds.
Frequently
Asked Questions
Are Single Stock
Futures better than trading stocks?
An advantage that
single-stock futures have over trading stocks is that
you can sell without waiting for an uptick. So, when
the stock price is dropping, you might be
able to take a short position in single-stock futures
sooner than if you
wait for an uptick to sell the stock itself.
Are Single Stock
Futures better than trading equity options?
Single-stock futures
are more straightforward than equity options, where
you have to
decide which strike price to trade within each
contract month, a decision
that may involve an analysis of time premium. With
futures, it's an easy
decision: Do you believe the price of the underlying
stock is going to
higher or lower than the current price indicated by a
certain futures
contract when that contract expires? Buy futures if
you think the price will
be higher. Sell futures if you think the price will be
lower. It’s that simple!
How big are Single
Stock Futures contracts?
Each futures contract
represents 100 shares of underlying stock. That is the
contract size used at LIFFE and by the Chicago Board
Options Exchange (CBOE) for equity options.
What are the margin
requirements for Single Stock Futures?
The initial margin
requirements for Single Stock Futures will be 20% of
the contract
value. If so, margin would be $2,000 for one contract
that represents 100
shares of a $100 stock (contract value of $10,000).
How
is a Single Stock Futures contract different from an
equity option
contract?
When you buy or sell a
single-stock futures contract, you are
obligated to fulfill the terms of the contract upon
its expiration (unless
you offset the position before then). When you buy an
equity option
contract, you have the right, but not the obligation,
to either buy or sell
100 shares of the underlying stock at the option's
strike price by the time
the contract expires. When you sell an equity option
contract, you are
obligated to either buy or sell 100 shares of the
underlying stock at the
option's strike price at contract expiration.
The list for Single Stock Futures
American Express (AXP)
American International Group (AIG)
Amgen Inc (AMGN)
AMR Corp/Del (AMR)
AOL Time Warner, Inc. (AOL)
Applied Materials (AMAT)
AT&T Corporation (T)
Bank Of America Corp (BAC)
Bank One (ONE)
Best Buy Company Inc (BBY)
Biogen Inc (BGEN)
Bristol-Myers Squibb Co (BMY)
Broadcom Corp-Cl A (BRCM)
Brocade Communications Sys (BRCD)
Cephalon Inc (CEPH)
Check Point Software Tech (CHKP)
ChevronTexaco Corp (CVX)
Cisco Systems, Inc. (CSCO)
Citigroup, Inc. (C)
Coca-Cola Company (KO)
Dell Computer Corporation (DELL)
eBay, Inc. (EBAY)
EMC Corporation (EMC)
Emulex Corp (ELX)
Exxon Mobil Corporation (XOM)
Ford Motor Company (F)
General Electric Company (GE)
General Motors Corp (GM)
Genzyme Corp - Genl Division (GENZ)
Goldman Sachs Group, Inc. (GS)
Halliburton Co (HAL)
Home Depot Inc (HD)
Idec Pharmaceuticals Corp (IDPH)
Intel Corporation (INTC)
International Business Machines (IBM)
InVision Technologies Inc (INVN)
J.P. Morgan Chase & Co. (JPM)
Johnson & Johnson (JNJ)
KLA-Tencor Corporation (KLAC)
Krispy Kreme Doughnuts Inc (KKD)
Merck & Co., Inc. (MRK)
Merrill Lynch & Co., Inc. (MER)
Micron Technology Inc (MU)
Microsoft Corporation (MSFT)
Morgan Stanley Dean Witter & Co. (MWD)
Motorola, Inc. (MOT)
Newmont Mining Corp Hldg Co (NEM)
Nokia Corporation ADR (NOK)
Northrop Grumman Corp (NOC)
Novellus Systems Inc (NVLS)
Oracle Corporation (ORCL)
PepsiCo Inc (PEP)
Pfizer (PFE)
Philip Morris (MO)
Procter & Gamble Co (PG)
QLogic Corp (QLGC)
QUALCOMM, Inc. (QCOM)
SBC Communications Inc (SBC)
Schlumberger Ltd (SLB)
Siebel Systems, Inc. (SEBL)
Sprint Corp-PCS Group (PCS)
Starbucks Corp (SBUX)
Sun Microsytems (SUNW)
Symantec Corp (SYMC)
Texas Instruments Incorporated (TXN)
Tyco International Ltd (TYC)
UAL Corp (UAL)
VERITAS Software Corporation (VRTS)
Verizon Communications Inc (VZ)
Wal-Mart Stores Inc (WMT)
Xilinx Inc (XLNX)
Narrow
Based Indices
Narrow
Based Indices
are futures contracts on small groups of stocks that
allow an investor to take a position in a concentrated
area of the equities market. Each narrow-based index
will typically include three to nine companies in a
specific industry sector.
A
OneChicago narrow-based index futures contract is an
agreement to deliver shares of the underlying stocks
at a designated date in the future, called the expiration
date. At all times, four expiration dates will
be available for trading OneChicago narrow-based
indices. OneChicago narrow-based indices are
physically settled at expiration.
Using
these indices, investors can take a long or short
position in a concentrated basket of stocks without
incurring multiple transaction fees.
Margin
requirements are generally 20% of the cash value of
contract, although this requirement may be lower if
the investor also holds certain offsetting positions
in cash equities, stock options, or other security
futures in the same securities account.
No
uptick is required to establish a short position in
OneChicago's products. Short sellers may also benefit
from eliminating the costs and inefficiencies
associated with the stock loan process.
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Airlines
AMR Corp/Del (AMR)
Continental Airlines Inc. CL B (CAL)
Delta Air Lines (DAL)
Southwest Airlines (LUV)
UAL Corp (UAL)
Banks
Bank One (ONE)
SunTrust Banks (STI)
Wachovia Corp (WB)
Wells Fargo (WFC)
Biotech
Amgen Inc. (AMGN)
Biogen Inc. (BGEN)
Chiron Corp (CHIR)
Genzyme Corp - Genl Division (GENZ)
Human Genome Sciences (HGSI)
Computers
Apple Computer Inc. (AAPL)
Dell Computer Corporation (DELL)
International Business Machines (IBM)
Research in Motion (RIMM)
Sun Microsystems (SUNW)
Defense
General Dynamics (GD)
Lockheed Martin (LMT)
Northrop Grumman Corp (NOC)
Raytheon Co (RTN)
Drugs
Abbott Laboratories (ABT)
Bristol-Myers Squibb Co (BMY)
Merck & Co., Inc. (MRK)
Pfizer (PFE)
Schering-Plough (SGP)
Gold
Agnico-Eagle Mines (AEM)
Barrick Gold (ABX)
Newmont Mining Corp Hldg Co (NEM)
Placer Dome Inc (PDG)
Investment Banking
Goldman Sachs Group, Inc. (GS)
Lehman Brothers Holdings (LEH)
Merrill Lynch & Co., Inc. (MER)
Morgan Stanley Dean Witter & Co. (MWD)
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Networking
Adaptec Inc (ADPT)
Black Box Corp (BBOX)
Cisco Systems, Inc. (CSCO)
Emulex Corp (ELX)
Juniper Networks (JNPR)
Oil Services
Baker Hughes Inc. (BHI)
BJ Services (BJS)
Halliburton Co (HAL)
Schlumberger Ltd (SLB)
Weatherford International (WFT)
Pharmacies
Biovail Corp (BVF)
Cephalon Inc (CEPH)
Elan Corp ADR (ELN)
MedImmune Inc (MEDI)
Sepracor Inc (SEPR)
Retail
Autozone Inc. (AZO)
Best Buy Company Inc. (BBY)
Circuit City Stores (CC)
Home Depot Inc. (HD)
Wal-Mart Stores Inc (WMT)
Semiconductor Circuits
Altera Corp (ALTR)
Analog Devices (ADI)
Integrated Device Technology (IDTI)
Linear Technology Corp (LLTC)
Maxim Integrated Products (MXIM)
Semiconductor Components
Broadcom Corp-CL A (BRCM)
Intel Corporation (INTC)
Micron Technology Inc (MU)
Texas Instruments (TXN)
Xilinx Inc (XLNX)
Software
Adobe Systems (ADBE)
Electronic Arts (ERTS)
Microsoft Corporation (MSFT)
PeopleSoft Inc (PSFT)
Siebel Systems, Inc. (SEBL
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Customers wishing to
trade Narrow Based Indexes and Single Stock Futures
Products, should contact ExpressFutures.com,
1-888-769-9499 to obtain a copy of the required
Security Futures Product’s Risk Disclosure
Statement. You may also down load the required risk
disclosure statement from http://www.nfa.futures.org/compliance/sfp_disclosure.pdf.
Narrow Based Indexes and Security Futures Products are
not suitable for all investors. The risk of loss
associated with these products can be substantial.
11/18/2002 -
2002CINV01352
