Single Stock Futures

Single stock futures are also called SSFs and, although they are futures, the underlying asset is a single stock rather than a commodity such as wheat. When stocks are the underlying, they are usually purchased in groups of 100.

But unlike commodities, investors are able to leverage themselves within the futures market and the stocks can be traded on margin. By being traded on margin, this means that a person has the leverage that they need to borrow money for trading if they do not already have the money within their brokerage account.

How it Works

You have two investors and the SSF is the contract. The buyer makes the promise to pay for the 100 shares of stock at a future date that has been determined. The seller makes the promise to deliver the 100 shares by the future date and will accept the predetermined price for those shares.

The predetermined price is a price that is predicted. It is the price that the seller believes the stock will be worth by the specified date and that is what the buyer is agreeing to buy it for.

And bear in mind that these are short term investments. There are four quarterly expiration dates. Those months are March, June, September, and December. The last day that a trade can take place is the last Friday of the expiration month. So if the expiration month is September, the date is going to be the third Friday in September - whatever day that may be. For instance, let's say the third Friday of September is the 16th, which is what would occur in the case that there are 5 Fridays in the month.

The margin requirement to make the investment is 20% of the stock's cash value, in most cases. But although it is supposed to be that the stock is delivered by the expiration day of the expiration month, most people do not hold the contract until the expiration date. Again, this makes this a truly short term investment. The buyer sells their shares before the expiration date, which allows them to take a short position and allows money to be made sooner.

Margin Requirement

The 20% margin requirement is when a person borrows the money to buy the stock. The stock is then used as collateral for the money that was borrowed to buy it. When making a margin deposit on an SSF contract, you are making a deposit in good faith. The brokerage firm or financial advisor that you are working with will hold this deposit for you until it is time to settle the contract. Both the buyers and the sellers must meet the margin requirement to ensure that both parties are going to follow through with their end of the contract in some way.

The margin requirement is also continuous. This means that if the cash value of the stock changes, the 20% changes. If it goes up, then 20% of that amount is going to be higher than the amount of money deposited. This means that additional funds may need to be deposited. It is important that the 20% is maintained at all times because it is federally mandated in order to uphold the contract. In the end, an individual can make some money by selling before expiration.

So as you can see, single stock futures can be quite profitable. By being able to borrow on margin, you are given the ability to make investing in SSFs possible. Furthermore, you are able to find and use strategies of your own that will help you to profit from these investments.

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