Single Stock Futures Definition, Uses, and How They Work (2024)

Single stock futures (SSFs) are contracts where one party promises another to deliver 100 shares of a company at a specific price in the future. Authorized by the U.S. in 2002, the last exchange to list them, OneChicago, closed in 2020, leaving nowhere to buy them. SSFs have proven more popular in international markets, including India, Italy, Kenya, Malaysia, Saudi Arabia, South Africa, Spain, and the U.K.

The buyer of an SSF, called the "long" side of the contract, promises to pay a specified price for 100 shares of a single stock on the delivery date. The seller, who is on the "short" side of the contract, is the one who promises to deliver the stock in the exchange. Below, we take you through the history of trading in this security, which is quite revealing about intra-agency rivalries in the U.S., and how they work when sold in the U.S. and internationally.

History of Single Stock Futures

Single stock futures (SSFs) were introduced in the U.S. market in 2002. Their delayed entry in previous years was primarily due to long-standing turf battles between the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). The two regulatory agencies, known for one of the most notorious interagency rivalries in the U.S., claimed authority over financial instruments like derivatives, which could be considered securities and also commodities. By the early 1980s, investors often faced different sets of regulations for the same financial products.

To resolve the mess, Congress intervened, forcing negotiations between SEC chair John Shad and CFTC chair Philip Johnson. The result was the 1981 Shad-Johnson Jurisdictional Accord, a title that evoked memories of the historic Camp David Accords two years earlier that brought peace between bitter enemies Israel and Egypt in part by settling long-disputed borders. The hope was this accord would do the same, including carefully settling the boundaries where each regulator would have final authority. While the CFTC and SEC have cooperated far more since the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 significantly altered the financial industry, the Shad-Johnson Accord marked a major step in setting up solid borders between the financial instruments over which the SEC had authority (stocks, bonds, mutual funds, etc.) and those under the remit of the CFTC (commodities, options, futures, etc.).

Single stock futures, whose very name meant they fell right between the two, were still banned, seemingly for no other reason than that if one agency couldn't have authority over them, at least the other wouldn't either. The ban was finally lifted in 2000 with the passage ofthe Commodity Futures Modernization Act (CFMA), which allowed trading in SSFs. Two years later, the Investor and Capital Markets Fee Relief Act moved exchanges into action to offer SSFs after cutting the trading fees left in place by the CFMA. Despite the hopes of some—a 2001 Wall Street Journal headline repeated the common view that "Single-Stock Futures Offer the Promise of Fat Profits"—sales of SSFs never took off.

Yet, while SSFs would never catch on among investors, the CFTC and the SEC began allowing other securities like American deposit receipts, shares of exchange-traded funds (ETFs), and debt securities that could also serve as the underlying assets of security futures products. In the end, several reasons for the lack of interest in SSFs from 2002 to 2020 are clear: competition from other derivative products, regulatory complexities (the old CFTC-SEC battles over joint jurisdiction), and the fact that few investors had heard of them. In 2020, trading in SSFs in the U.S. stopped when OneChicago, the only exchange offering SSFs, ceased operations. SSFs remain legal, but investors have nowhere to buy them.

The Single Stock Futures Contract

In countries where they are still sold, SSF contracts are standardized and typically have the following features:

• Contract size: 100 shares of the underlying stock
• Expiration cycle: Generally quarterly (March, June, September, and December)
• Minimum price fluctuation:1 centX 100 shares = $1
• Last trading day: Third Friday of the expiration month
• Margin requirement: A percentage of the stock's cash value, typically 15% to 20%

Most contracts are closed before expiration. An investor simply takes an offsetting short position to exit an open long position.

Conversely, if an investor has sold a contract and wishes to close it out, buying it will offset or close it out.

How Margin Works for Single Stock Futures

For an SSF contract, the brokerage firmholdsthe margin deposit toward the contract settlement. The margin requirement in an SSF applies to both buyers and sellers.

Whatever the required percentage needed in the account, the initial and maintenance margins are generally the same. In an SSF contract, the buyer (long) doesn't borrow money and pays no interest. Meanwhile, the seller (short) has not borrowed stock. The margin requirement for both is the same.

Uses For Single Stock Futures

As with other futures, SSFs typically serve two main purposes. First, SSFs may be used to hedge, which allows investors to protect their stock portfolios from adverse price movements. For example, an investor holding a stock can sell an SSF on the same stock to lock in a future sale price. Traders can use SSFs to speculate on the future price movements of individual stocks without the need to own the underlying shares. This can be done by taking long positions (buying SSFs) if they anticipate the stock price will rise, or short positions (selling SSFs) if they expect the price to fall. Let's go through examples of each.

Speculation

Suppose an investor is bullish on stock Y. They purchase a single September SSF contract on stock Y at $30. Over the following week, stock Y climbs to $36. The investor then sells the contract at $36 to offset the existing (open) long position. The total profit on the trade is $600 ($6 x 100 shares).

This example is straightforward, but let's examine the trade closely.

The initial margin requirement was only $600 ($30 x 100 = $3,000 x 20% = $600). So, the investor earned a 100% return on the margin deposit, illustrating the significant leverage in SSF trading. Of course, leverage works both ways, which could make SSFs particularly risky.

Let's look at another example where the investor is bearish on stock Z. They sell an August SSF contract on stock Z at $60. Stock Z performs as the investor had guessed and drops to $50 in July. The investor offsets the short position by buying an August SSF at $50. This represents a total profit of $1,000 on the trade ($10 x 100 shares).

Again, let's examine the investor's return on the initial deposit. The total profit was $1,000 on an initial margin requirement of $1,200 ($60 x 100 = $6,000 x 20% = $1,200), which translates to a good return of 83%.

Hedging

To hedge a stock position, an investor must sell an SSF contract on that same stock. If the stock falls in price, gains in the SSF will work to offset the losses in the underlying stock.

However, this is only a temporary solution because the SSF will expire.

Let's consider an investor who buys 100 shares of stock N at $30. In July, the stock is trading at $35. The investor is happy with the unrealized gain of $5 per share but is concerned that the gain could be wiped out in one bad day. The investor wants to keep the stock at least until September, though, to receive an upcoming dividend payment.

The investor sells a $35 September SSF contract to hedge the long position. Whether the stock rises or falls, the investor has locked in a $5-per-share gain. In August, the investor sells the stock at the market price and buys back the SSF contract.

The table below is for this example: