In the near future, investors and traders will have the opportunity to trade single stock futures. Absolute Futures Commodity Brokerage, in a desire to inform, as well as, educate potential traders of Single Stock Futures, will provide information pertinent to Single Stock Futures (SSF) as it becomes available.
the next section is an explanation, advantages, uses, margins, etc. for (SSF).
Single stock futures are used with a broad range of trading strategies and can be applied to a variety of portfolio management needs. Since the price of an equity future typically tracks the price of the underlying instrument nearly tick for tick, trading strategies used in the stock market today should be transferable to the stock futures market.
Many existing strategies in use in the stock market today may also be applicable to single stock futures and narrow-based indices. Here are examples of how these products can allow investors and portfolio managers to inexpensively execute a wide range of trades:
Anticipated and unanticipated corporate events such as earnings announcements, FDA rulings, mergers and acquisitions, and regulatory actions can trigger volatility. Suppose an institution is long a technology index futures contract and one of the companies in that index is scheduled to release its earnings after the close. That company's price volatility may increase after the release. Rather than selling the index and relinquishing the potential benefits from favorable price movements, a more cost-effective alternative is to sell the SSF on that company's stock in the amount it is represented in the index investment. This strategy hedges the expected volatility in the narrow-based index in the near-term.
Interest rate volatility example: Consider the example of an investor with a portfolio of stocks for which prices have been historically sensitive to interest rates, such as in certain sectors of the financial services industry. Prior to an important economic announcement (e.g., the unemployment rate), the investor might sell a narrow-based index future in that sector to hedge the position from short-term volatility on the morning of the economic announcement.
Diversification is a cornerstone of modern portfolio theory. Successful diversification should in theory not only enhance returns, but also smooth their expected path. This is the objective of most investors who construct a sophisticated portfolio. The efficiency of security futures facilitates several diversification strategies:
Since the first index products were introduced over two decades ago, many investors and money managers have come to believe that sector selection, rather than individual stock selection, is a key determinant of investment returns.
Narrow-based indices are designed to reflect a specific market sector and will contain nine or fewer equities. Examples of industries and industry sectors might include:
Mutual fund switching has become popular with certain investors that use technical and fundamental analysis to guide sector-based investment decisions. As the strategy grew in popularity, however, most mutual fund companies limited and/or charged substantial fees to those who wanted to actively switch among sector funds. Futures on narrow-based indices may provide an effective alternative to re-balancing a portfolio.
ll futures contracts have expiration dates. There are three basic approaches for managing the expiration of futures contracts:
Offset your position: Prior to expiration, you may offset by covering (buying back) a short position or selling a long position. You don't have to wait until the expiration date to complete your trade. Many investors choose to offset equity futures positions before expiration.
Wait until the contract expires, then make or take delivery: On the expiration date, holders of short positions of stock futures are required to deliver physical shares of the underlying stock, and holders of long positions take delivery of the underlying stock. This means that buying a single stock future and holding it until expiration, provides you ownership of the underlying stock after the expiration date. If you are considering holding a stock futures contract until expiration, consult your brokerage firm regarding its procedures and fees associated with delivery. If you offset your position, this process does not apply.
Roll the position over from one contract expiration into the next: If you hold a long position in an expiration month, you can simultaneously sell that expiration month and buy the next expiration month for an agreed-upon price differential. Thus the position is transferred, or
rolled forward, and can be held for a longer period.
Single stock futures prices generally conform to a theoretical pricing model based on the following formula: Futures price = stock price x (1 + annualized interest rate - dividend)
Futures will typically trade at a premium to the stock price because of an adjustment for interest rates. The premium reflects the interest earned on the capital saved by not posting the full value of the underlying stock. Since futures holders are not entitled to collect dividends, the futures price must be adjusted downward by the present value of the dividend payments expected prior to expiration. When a large dividend payment is forthcoming or if the underlying stock is difficult to borrow, the futures price may trade at a discount to the actual cash price.
Margin Requirements Highlights
You should be aware that trading futures involves the risk of loss, including the possibility of loss greater than your initial investment. Stock futures may not be suitable for all investors. Consult your broker or financial advisor before trading.
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© 2010 Absolute Futures and Commodities
Any statement of facts herein contained are derived from sources believed to be reliable, but there are no assurances as to accuracy, nor do they purport to be suitable for all individuals. Past performance is no indication of future results. There is a risk of loss in trading Futures and Options.