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Single Stock Futures - FREE Investor Kit |
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Many existing strategies in use within the stock market today may also be applicable to singe stock and security futures. Below are some examples of how these products can allow investors and portfolio managers to inexpensively execute a wide range of trading strategies. Single Stock Futures - Speculation The most basic way of utilizing single stock futures products is through speculation. For example, if you think that shares in Dell will increase in value in the near-term, you could buy (go long) one contract of Dell (100 shares) for delivery within three months. If the price of Dell increases, you can then liquidate your one contract of Dell (100 shares) and witness a profit. However, if believe that shares in Dell will decrease in value in the near-term, you can sell (go short) one contract of Dell (100 shares) for delivery within three months. If Dell shares decline in price you can then cover the position and buy one contract of Dell (100 shares) and make a profit. (Short Selling) Single Stock Futures - Spread Trading Another way of using single stock futures and narrow-based index futures is for spread or pair trading. Spread trading is the purchase and sale of different but related entities. Single Stock Futures - Top of Single Stock Futures Strategies Page Single Stock Futures - Short Selling If a stock trader wishes to sell a stock short, he must first have the shares to sell. Normally, this is done by borrowing shares of a particular issue from a firm’s stock loan department. Additionally, there are charges for borrowing shares and interest can be earned on the proceeds from the sale. Furthermore, there are also two other factors to consider, a short seller is liable for dividend payments and the total quantity of shares sold by an individual cannot exceed available shares outstanding. Lastly, to establish a short position customers are held to the “up-tick” rule. Single stock futures are an ideal vehicle for engaging in the practice of short selling because the traditional problems associated with short selling, such as the borrowing of stock and interest charges, are alleviated. Single Stock Futures - Top of Single Stock Futures Strategies Page Single Stock Futures - Hedging For example, if you have a portfolio that includes a particular issue that has released information you think will negatively impact the stock in the short term, but shouldn’t have a prolonged impact; you could sell a single-stock futures contract on the stock as a hedge. If the stock declines in price, you will witness a loss on your stock position but you will make money on your futures position. Single Stock Futures - Top of Single Stock Futures Strategies Page Single Stock Futures and Narrow-Based Indices - Index Balancing Broad-based index investments within the S&P 500 and other benchmark indices have experienced tremendous growth as a tool to reduce the risk of underperforming the market. Single stock and narrow-based index futures contracts provide the means to remove a particular stock or sector from a broad-based index by shorting the undesired security or sector. By utilizing single stock futures for this purpose investors can fine-tune an index investment by adding individual issues or narrow-based indices contracts to gain added exposure to sectors exhibiting relative strength. Single Stock Futures - Top of Single Stock Futures Strategies Page Single Stock Futures - An Alternative to Options When trading options on individual stocks, there are certain trading aspects that must be considered. For example, the month, strike price, and time premium involved. If you were interested in using options to create a synthetic futures position, you would have to do two transactions (creating a commission for each trade). Additionally, if the stock prices were in the money, the bid/offer spread would be under, due to less liquidity. A single-stock futures trade involves one transaction, select the month, and execute the trade. When trading a single-stock futures, there is an obligation to deliver shares or cash (if cash settled) value. The seller of a single stock futures contact receives no proceeds from the transaction and no obligation to pay dividends. There is no limit on total short open interest and there is no up tick rule in futures. It should be noted that all the above uses of single-stock futures presume that the single-stock future’s fair value price is based on the cost of carry model, the price should reflect the dividend and the cost of financing the stock. Single Stock Futures - Top of Single Stock Futures Strategies Page Single Stock Futures - "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. Single Stock Futures - Top of Single Stock Futures Strategies Page |
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Futures Trading | Online Futures Trading | Forex Trading | Managed Futures | Managed Forex |
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© Aaron Trading / AaronFX. All Rights Reserved. |
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