Absolute Futures

Learn about single stock future

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Learn About Single Stock Futures

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). 

Advantages of Single Stock Futures

  • With margin requirements of 20%, single stock futures provide a highly capital efficient way to participate in equities.

  • No uptick is required to establish a short position.

  • Short sellers may benefit from eliminating the costs and inefficiencies associated with the stock loan process.

  • Advantages of Narrow-Based Indices:

    Using these indices, investors can take a long or short position in a concentrated basket of stocks without incurring multiple transaction fees. This structure allows difficult-to-execute or advanced investing strategies such as spread trading or sector rotation to be executed swiftly and cost efficiently, as narrow-based indices are also subject to a margin requirement of 20% of the cash value of the contract.

Range of Trading Strategies

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.

Trading Strategies Overview

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:


Protect a long equity position against price volatility or short-term downward movements.
Use futures as an inexpensive alternative to purchase a stock, and then take delivery of the underlying stock to augment your portfolio
Use narrow-based indices to invest cost-effectively in specific economic sectors
Trade long/short pairs.
Use single stock futures as a cost-effective hedge for stock options positions.
Continue using the analytic approaches you currently employ for investment decisions in stocks or futures (such as technical analysis, chart-based strategies, and fundamental analysis)

Some of the specific uses of security futures may include:

Long or short directional trades: Security futures provide the advantage of capital efficiency for taking long or short positions in specific securities.
Index hedging: The growth of broad-based index investments in the S&P 500 and other benchmarks has experienced tremendous growth as a strategy to reduce the risk of under-performing the market. SSFs provide a means to remove a stock from an index investment by shorting the undesired security using a futures contract. Investors can fine-tune an index approach by adding narrow-based indices to gain added exposure to sectors exhibiting relative strength.
“Portable alpha” trading: Single stock futures and narrow-based indices will expand opportunities for “portable alpha” strategies that are used by some institutional investors. In this strategy, a money manager hedges out some or all of the fund’s exposure to a less desirable asset class or market sector by shorting an index future in that asset class or sector. The sponsor or manager then buys futures contracts in a more desirable asset class or market sector. Hedging Positions

Substitution and Hedging in Individual Accounts

Basic hedging: After large price gains, an investor may anticipate that a stock will trade sideways for a time. Rather than selling the position, the investor could hedge by selling single stock futures. This strategy protects against price depreciation, while preserving ownership rights of the underlying position.
Fine-tune market exposure: Single stock futures could be used to invest in equities that might have more favorable short-term upside potential than an investor’s current holdings. Investors may fine-tune their market exposure using security futures without changing the composition of their cash equity portfolio.
Hedge 401(k) positions in company stock until the next selling period: Covenants in benefit plans sometimes prevent the selling of equity holdings except during prescribed periods. Individuals can use SSFs to hedge their exposure to company stock until the next selling period.

Volatility Hedging

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:

Dynamic diversification: It is possible to efficiently execute a technical approach that buys the highest momentum sectors and sells the lowest. The ease of trading futures suggests that this strategy could be implemented quickly when there is sudden sector rotation.
Pairs trading, value and relative strength investing: In pairs trading, one firm within an industry is bought and a competitor is simultaneously sold short. This provides an investor with exposure to the relative performance of the two companies with limited exposure to broader market and sector performance.
More broadly, relative strength investing refers to taking contrary positions in under-performing and over-performing instruments. Typical matches may include stocks vs. their peers; narrow-based indices vs. broad market indices; popular index vs. popular index; and single stock future vs. narrow-based index. This type of strategy can be efficiently implemented using security futures.

Sector Selection / Rotation

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:

– Natural gas, Transmission, Extraction services, and High technology companies
Personal computer makers
– Computer storage, Database software, Security, and Online markets
Health care providers
– HMOs, Pharmaceuticals, and Hospital operators
– Wireless, Networking, and Infrastructure

Narrow-based indices as an alternative to mutual fund switching

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.

Managing Expiration Dates

All 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.

Security Futures Pricing

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.

Security Futures Margin Requirements

Margin Requirements Highlights

The basic margin requirement for security futures is 20% of the underlying value of the contract (initial and maintenance margin).
This 20% minimum may be reduced for certain types of futures market positions, such as calendar and basket spreads, and for certain offsetting positions in stock options and cash securities, provided the security futures are held in securities accounts.
Margin requirements can be satisfied with cash, margin securities, and open trade equity in other futures accounts.
Certain industry professionals (such as qualified market makers) are exempt from these requirements.
Portfolio-based margining (e.g. SPAN margining) is not yet permitted for customer positions in security futures. Firms will nonetheless continue to receive SPAN files that reflect the appropriate minimum margin requirements.

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.
An expert commodity broker or futures broker will work closely with you to develop a Personal Investment Strategy that you will feel comfortable with!