Single Stock Futures - Advantages

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.

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
Investors can also gain cross border exposure without the expense of going through foreign clearing systems. 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 commodity 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.

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