Single Stock Futures

[scorpioncapital]

Has anybody used them? Seems you can defer payment (20% margin) of a stock purchase up to 8 months locked in at a price today roughly equal to the bid-ask price, i.e. there is no premium like in options, financing cost if use margin is superior. Seems like those department store offers, don't pay principle or interest for 6 months! Only drawback is you have to commit to 1 contract or 100 share minimum and it only trades for major large cap US stocks.

[EdWatchesBoxing]

Sounds like this maybe a cost effective way to set up a long/short portfolio; rather than to use short selling or options.

[scorpioncapital]

Sounds like this maybe a cost effective way to set up a long/short portfolio; rather than to use short selling or options.

 

I'm trying to figure out which is a better deal.

 

An 8 month SSF at $24.80 when today's stock price is $25.

An equivalent option (in terms of premium, i.e. in this case 20% since that is the margin requirement for SSF) expiring in 16 months (twice as long) at $30/share when the stock is $25.

 

My inclination is to say the first option seems better, sure the time is 1/2 but there is no guarantee the stock will climb the 20% wall in 1.5 years.

[Cardboard]

These are futures, so there is an obligation to buy or to sell the security. An issue with them is that the market is not well developed and they are fairly illiquid.

 

You can create something very similar by buying a call and selling a put of the same strike price and at the money: synthetic long stock. You have unlimited upside, the call is paid by the short put and you have downside limited to the difference between the strike price and $0. I have not done such trade, but I figure that the margin requirement for the short put will be similar to what is required for the SSF.

 

Cardboard

[scorpioncapital]

What I don't understand with the SSF is if the total contract price is "debited" from my margin account.

 

E.g. suppose i have a margin loan outstanding of $10,000.

 

If I buy 1 SSF contract for $24.50, does $2450 come out of my account immediately today (so my margin balance goes to -$12,450) or only 20% of that or about $500 is debited today. If the former, it doesn't seem like such a hot deal. If I have to pay today $2450 and get the shares now vs. paying $2450 today and getting the shares 8 months later, the only benefit is the interest, not the deferred payment.

 

Anybody know?

[arbitragr]

What I don't understand with the SSF is if the total contract price is "debited" from my margin account.

 

E.g. suppose i have a margin loan outstanding of $10,000.

 

If I buy 1 SSF contract for $24.50, does $2450 come out of my account immediately today (so my margin balance goes to -$12,450) or only 20% of that or about $500 is debited today. If the former, it doesn't seem like such a hot deal. If I have to pay today $2450 and get the shares now vs. paying $2450 today and getting the shares 8 months later, the only benefit is the interest, not the deferred payment.

 

Anybody know?

 

Sorry for how late this reply is. I'm just starting to explore.

Okay I had a look at SSFs ... b/c I was looking for something simpler+cost effective to short.

They look good. Same if not better leverage, and margin requirements are similar.

In regards to the margins, it would be similar to a futures contract.

Your initial and maintenance margin are 20% of market value of the SSF. You keep topping up your account if it goes below.

 

The only problem is liquidity ... I had a look at the Chicago One site ... and volume is not high ... for something like JPM for example, volume was like zero for the last 2-3 days and open interest is 25: http://www.onechicago.com/?page_id=10&trade_data-ipsquote-timestamp=2010-01-25&expiration_year_month=201006&product_type=SSF&class_symbol=J&sort_value=t_volume&submit=Submit

 

Anyone have any idea on what trading ssf with low volume and liquidity is like??? Any whipsaw-ing???  :-[

 

Have you been trading SSF Scorpion? what's it like?

 

 

[watsa_is_a_randian_hero]

What I don't understand with the SSF is if the total contract price is "debited" from my margin account.

 

E.g. suppose i have a margin loan outstanding of $10,000.

 

If I buy 1 SSF contract for $24.50, does $2450 come out of my account immediately today (so my margin balance goes to -$12,450) or only 20% of that or about $500 is debited today. If the former, it doesn't seem like such a hot deal. If I have to pay today $2450 and get the shares now vs. paying $2450 today and getting the shares 8 months later, the only benefit is the interest, not the deferred payment.

 

Anybody know?

 

I have traded before, only in very large companies.  Liquidity is very low.  Definitely do not use market orders.  Use EFP (Exchange For Physical) orders.  These let you order the future in terms of a premium/discount to the underlying.

 

Benefits-

Reduced margin

 

Downside-

Reduced liquidity

Tax treatment (no ability for long-term cap gains)

 

An interesting note is that the IRS actually considers them not to be commodities (as most futures are), and rather are treated securities.  Normal futures are treated as Section 1256 contracts. Section 1256 contract gains are allowed to be treated 60% as long term and 40% as short term.  However, because single stock futures are not treated as Section 1256 contracts, and because you must roll your contracts, you will always be treating gains as short term.

[scorpioncapital]

I was going to trade them but then I realized the kind of stock I own is an S&P 500 stock with a 30% margin requirement. The margin requirement of 20% is only 10% lower - and there is no way I was going to get close to either limit anyway. I wasn't too sure what other advantage, other than the leverage/initial deposit, there would be.

[arbitragr]

The other advantages would be you don't have to borrow money if you want to leverage ... and pay your broker whatever rate. Most brokers charge a fortune except for IB.

And if you're looking to short, you don't have to find securities to borrow, thus no institutional impediments and counterparty risk.

 

I certainly see advantages over options (no time decay, no paying a premium for volatility) ... but for the liquidity issue.

But I think the SSF, as designed by ChicagoOne tracks the underlying stock, and if you need to sell then the exchange must buy.

 

Also I'm sure I read somewhere that Interactive Brokers owns part of ChicagoOne (the exchange) so ... that's all good from a transactional and order fulfilment standpoint.

 

what is the exchange for physical ... actually?? is that like a different type of order?

 

 

[arbitragr]

Some useful reading:

 

Always good to read the risk disclosure statement: http://www.onechicago.com/?page_id=91

 

Wiki: http://en.wikipedia.org/wiki/Single-stock_futures

 

Chicago one webinar: http://www.onechicago.com/tutorial/index.html

 

http://www.investopedia.com/articles/optioninvestor/06/SingleStockFutures.asp

 

 

Might get that book on Amazon called Single Stock futures: an investors guide.

[arbitragr]

Just having a look now ... Some mechanics:

 

commissions are tiny: 30 cents!!

cheaper than stocks.

 

spreads can get wide as you go out ... example ... JPM Sep10 bid: 37.68 ask: 40.69, last: 39.31 ... no wonder chicagoone (and IB for that matter as they own a stake in CO) makes money.

 

however for those stocks with negative outlook, the ask can even be lower than the underlying last trade price.

[scorpioncapital]

I think SSF's, unlike options, are a commitment to buy the stock at a future date. While it is true that one might be able to close a position, the liquidity might be an issue. Therefore, one would still have to make full payment at delivery. In this sense, SSF's would make great sense as a cash-flow management tool, when you expect certain cash-flows into your investment account at some future date within the next year but want to lock in today's price.

[Daytripper]

thanks for the interesting topic.

[arbitragr]

I think SSF's, unlike options, are a commitment to buy the stock at a future date. While it is true that one might be able to close a position, the liquidity might be an issue. Therefore, one would still have to make full payment at delivery. In this sense, SSF's would make great sense as a cash-flow management tool, when you expect certain cash-flows into your investment account at some future date within the next year but want to lock in today's price.

 

Closing the position is not hard. You can close it any time - you can buy and sell in one trading session easy. It's just the spreads might be a bit out of whack, and might cost (or give you) a couple of extra points.

I see no difference in liquidity in terms of say, a SSF vs. the S&P500 e-Mini futures contract. Especially if the exchange (being the market maker) has to close your position.

If you plan to hold a SSF position for longer than 3-6 months then there might be an issue of rolling over your investment.

However if you have arbitrage in mind, or are more short term in your focus, then SSF would be a great tool to trade on.

In any event, with commissions on SSFs at 30cents, if you're investment is still (according to your appraisal) undervalued, there's nothing wrong with rolling it over, selling your current position and buying out the next three months. Transaction costs are meaningless.

 

Only issue is tax. But I've always been of the view that, the government only taxes you when you make money ... not when you lose. Winners in our society pay tax.  ;)