HOW DO I
USE SINGLE-STOCK FUTURES?
Single stock futures can be used in a variety of simple and complex
strategies. The potential is limited only by an investor's imagination.
The uses of single stock futures include:
- Speculation
- Hedging
- Spreading
- Index Balancing
Speculation:
Investors who believe that a stock will rise can use single stock futures
to cheaply and efficiently take a long position. Similarly, investors who
believe that a stock will fall can use single stock futures to cheaply and
efficiently initial a short position.
Hedging:
Investors can pair a single stock futures position with an underlying cash
position in order to hedge price risk. Unlike options, the delta on a
single stock futures contract is theoretically one at all times. The delta
on an option is most likely to be less than one at time of transaction and
the delta becomes zero or one at expiration. As result, single stock
futures are expected to provide a more perfect hedge than stock options.
Spreading:
Single stock futures can be used in pair trading or spread against stock
index futures to capture company specific return in a strategy called
"alpha capture". Pair trading involves selling one single stock futures
contract and buying another single stock futures contract to exploit
differing returns on underlying equities. Examples include selling one
automaker against another automaker or one pharmaceutical company against
another pharmaceutical company. Alpha capture involves buying a single
stock futures contract against a stock index in order to exploit a
company's return verses the market's return. Examples include buying a
single stock futures contract on Microsoft and selling the S&P 500 index
in anticipation of a new software product release.
Index addition
or deletion:
Single stock futures can be used in concert with stock indices to
add or delete a specific company's return to a stock index. For example,
one could have captured the return of the S&P 500 excluding a troubled
company like Enron. |
