REAL WORLD
The New Kid On The BlockSingle-Stock Futures
by Thomas L. Busby
Here's what every trader should know about them.
Just recently, the Commodity Futures Modernization Act of 2000 (CFMA) lifted the 18-year-old ban on single-stock futures. While we have yet to see just how this new kid on the financial block will trade, there are certain aspects of these new futures products that every stock trader should know about and be able to take advantage of.
While everyone will be trying to figure out what all the hype is about, it is important to realize that there are only a few key bits of information you must possess to understand how single-stock futures (SSFS) really work and how they can be traded. I hope the following observations will clarify some of the confusion about this newcomer to the trading world and help you decide whether this trading vehicle is right for you.
WHAT ARE THEY?
I am a 22-year veteran of the Standard & Poor's futures market, so my perspective is futures-based. The easiest way to describe a single-stock future is as a futures contract hinged on an individual stock. S&P contracts find their value in the overall performance of the entire S&P index. Like an S&P contract, an SSF conveys no ownership rights in the actual company on which it is based. Rather, its value is determined from the performance of a single stock; the trader owns only the obligation to purchase or sell that individual stock at some point in the future.
With the success of relatively new financial products such as the Nasdaq's "cubes" (QQQs), Dow Jones's "diamonds" (DIA), and the S&P's SPDRS, the introduction of single-stock futures signals a further easing of trading rules and a more flexible approach. To recoup revenues lost to foreign markets that have traded stock futures for years, Congress responded by enacting the CFMA. This abrogates the effect of the Shad-Johnson accord, which had prevented the trading of SSFS. The result? Individual traders will have another method of investing that will allow them to trade more specifically the type of commodity they want.
...Continued in the April 2002 issue of Technical Analysis of STOCKS & COMMODITIES
Excerpted from an article originally published in the April 2002 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2002, Technical Analysis, Inc.
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