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TECHNICAL ANALYSIS

MARKET REVIEW

 

What is a single stock futures contract?

A single stock futures contract is an agreement to buy or sell shares of stock such as General Electric, McDonalds, Phillip Morris, or others in the future. The buyer has an obligation to purchase shares of stock and the seller has an obligation to sell shares of stock at a specific price at a specific date in the future. Single stock futures contracts are completed by offsetting a position or the actual delivery of shares at expiration. Margin on a single stock futures contract will be 20% of value.

What is a futures contract on a narrow based index?

A futures contract on a narrow based index is an agreement to buy or sell a basket of individual equities at a point in the future. The buyer has an obligation to purchase the basket of stocks and the seller has an obligation to sell the basket of stock at a specific price at a specific date in the future. The futures contract on a narrow based index is completed via offset or physical delivery at expiration. Margin is expected to be 20% of notional value.

There are at least six benefits to using Single Stock Futures:

1. Easier and cheaper to initiate a short stock position
2. Cheaper to leverage a long stock position
3. Opportunity for improved cash flow
4. Cleaner hedge relative to options
5. Potential tax benefits
6. Foreign investors can reduce foreign exchange risk