A single stock future (“SSF”) is simply a futures contract on an individual stock or ETF. OneChicago® SSFs are physically delivered contracts, meaning the long futures holder will be delivered the underlying stock or ETF upon expiration.
The unique aspects of SSFs allow for innovative trading strategies that can be utilized by both futures and equity traders managing their equity and cash positions in order to minimize their costs of financing long or short positions and thus maximize returns.
SSFs are an alternative way to acquire and maintain delta exposure to an individual stock or ETF.
For example, a customer who wants delta exposure to $50,000 of IBM stock on March 27th, 2013 has several options to acquire the exposure: (1) borrow from himself by financing the full purchase from savings (2) borrow from himself by financing half from savings and half through a margin loan in a Reg T account (3) buy single stock futures.
- 1. Customer funds the entire position from savings
- ● Customer pulls money from money market account, forgoing interest at 0.48% annually or $240
- ● Customer loses flexibility to use that cash for other purposes
- 2. Customer funds the position with $25,000 cash and $25,000 margin loan
- ● Customer pulls $25,000 from money market account, forgoing interest at 0.48% annually or $120
- ● Broker charges 8% annually or $2,000 for the $25,000 margin loan
- 3. Customer uses SSFs
- ● The customer buys the IBM SSF (stock + interest) with an embedded interest rate of 75 basis points or 0.75%
- ● Interest cost is $375 annually
- ● Customer uses treasury bill to meet initial margin requirement with the yield continuing to accrue to his benefit
- ● Customer continues to earn interest on the $50,000 cash in money market account, earning 0.48% or $240 annually.
Long stock holders ‘lend’ assets today through an agent that sometimes splits the fee with an agreement that they will get the asset back at some point in the future. In the interim, they will receive synthetic economic exposure to the position and will receive additional compensation for participation. This transaction is the same as buying an OCX.NoDivRisk® EFP (Exchange Future for Physical) transaction but with some very important differences:
- ● The EFP is traded on a regulated exchange.
- ● The EFP trades in a competitive environment where finance rates are established by multiple market participants.
- ● Transparent pricing.
- ● No counterparty risk as all trades are cleared through the AA+ rated OCC.
- ● No splits of the profits
- ● A long stock holder, who buys an OCX.NoDivRisk EFP (buy futures, sell stock) for a hard to borrow stock, earns the difference between the future price and the stock price; plus any interest that accrues on the proceeds from the stock sale.
A market participant who has equity investments can monetize those investments by doing a synthetic equity repo using the OCX.NoDivRisk futures.
- ● The long equity holder buys an OCX.NoDivRisk EFP (buy futures, sell stock), flattening out their stock position and creating a long OCX.NoDivRisk EFP position. The customer has full use of the proceeds from the stock sale while maintaining delta exposure through the futures position.
For more information, see here.
As of March 2013, the overnight repo rate was approximately 0.17%, the best EFP offer was 0.32%. The EFP rates vary; see current EFP offers rates at http://www.onechicago.com/?page_id=4289.
Idle Cash Investing
A market participant who seeks higher returns for idle cash can generate those returns by simultaneously opening a long stock position while selling OCX.NoDivRisk SSF, i.e. selling an OCX.NoDivRisk EFP.
- ● The participant buys the stock and sells the futures, thus investing the cash at the EFP rate with no exposure to the underlying price moves as the delta of the long stock is exactly equal to the delta of the short SSF. This position may be maintained by rolling forward the SSF leg. It may also be taken to expiration where the long stock position is used to satisfy the obligation of the expiring short future. It is important to remember that the long stock combined with the short SSF results in zero exposure to the underlying security movement making it a pure financing trade.
As of March 2013, average money market rates are 0.48%; the highest EFP bids were at approximately 0.68%, which is a 42% higher rate. The EFP rates vary; see current (updated during trading hours) EFP bid rates at https://www.onechicago.com/?page_id=4289.
Commodity Trading Advisor
CTAs can gain valuable exposure to individual stocks delta through using OCX.NoDivRisk futures. The OCX.NoDivRisk futures eliminate dividend risk, providing pure delta exposure to the underlying stock with a simple embedded interest rate which makes this a pure financing transaction. Single stock futures are the only futures products that can provide this exposure.
For a printable version of this page please see this pdf.