Improved Financing with Single Stock Futures

Discussion in 'Events' started by OneChicago, Feb 13, 2008.

  1. Single Stock Futures are simply the forward value of a stock which is computed by adding an annualized interest rate component to the price of the stock and subtracting any dividends to be paid prior to expiration.

    The interest component is the key as it is a competive rate used by professionals. Any trader should be ambivalent about purchasing an asset today or purchasing the same asset for delivery in the future as long as the cost of carrying the present value is the same or lower than the future value. If the present and future value are not trading at the proper basis then there is a risk free arbitrage to be had. Accordingly the stock and it's associated future will always trade in lockstep with each other and at expiration the future contract will expire into a long stock postion if it is not closed out prior to expiry.

    So if the stock and the Single Stock Future are the economic equivalent traders should be ambivalent about which one they purchase. Right?

    Not necessarily. For traders who use margin accounts to finance their trading the Single Stock Future may be a much better deal. If you think about it there is a interest rate charged on the margin loan which is higher than the competitive rate built into the Single Stock Future price so by buying the future instead you are paying an effective lower rate. Same economic trade but at a net lower price.

    For short sellers the same math holds true. When selling short the trader sometimes gets a 'rebate' on the invested returns of the proceeds that is below the interest rate built into the future. Traders who sell the future instead of going short the stock get to keep 100% of the interest component that is built in instead of a rebated percentage.

    Same trades but on much better financial terms.

    OneChicago has constructed a comparison calculator that allows traders to input variables such as the stock, expiration, quantity, Long and Short rates charged by their brokerage, deposit rate and performance bond (t-bill) rates they have access to. These inputs are in fact the costs and income streams from trading. The calculator uses these costs and incomes and uses a weighted average to derive a net interest rate for both the stock transaction and the equivalent Single Stock Future trade.

    It's very simple. If the interest rate is lower using the Single Stock Future the trader would be better off buying the future. Conversely if the interest rate is higher on the Single Stock Future
    then it would be the better instrument to sell.

    Same economic exposure to the market but at a lower cost. That is how traders increase their profits.

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  2. Can you publish current open interest on these contracts. You can upload a spreadsheet on ET with them or just put top 10 in a post
  3. Symbol Open Int
    GE1C 125056
    PFE1C 75048
    C1C 57867
    T1C 35945
    WFC1C 35164
    JNJ1C 20841
    VZ1C 19407
    DUK1C 14505
    KFT1C 12022
    SLE1C 5001
    SE1C 4000

    Daily Summary reports can be produced at our website:
  4. PDT applied or not applied to SIF?
  5. who offers these?
  6. ganesh6


    Does pattern day trading rule excluded form SSF.
    It will be great if it is excluded.
  7. Yes, i meant SSF not the PDT rule applied...
  8. SSF contracts are futures. I don't believe they are covered under the Pattern Day Trading rules but you should confirm with your broker.

    It is important to note that SSF may not be suitable for all investors and may not be appropriate for scalpers or other day traders.

    SSFs are at the end of the day a financing vehicle whereby customers can carry a position at a competitive interest rate instead of paying (or collecting for short sellers) a rate that is charged (or collected) by the brokerage firm.
  9. most of the SSFs I saw there had very anemic volume. IBM with 0 contracts traded?

    Are we missing something?
  10. #10     Feb 19, 2008