3.3.1. Basic Characteristics
The underlying security of a single stock futures contract is the common stock of a major corporation trading on the New York Stock Exchange or NASDAQ. To be listed as a futures contract, stocks must meet considerable capitalization and liquidity requirements. Approval by the SEC of these strict listing requirements is what finally enabled the launch of this new market.
Traders use single stock futures to speculate on the rise or fall of the price of a single stock. Investors also use single stock futures to hedge a large position in a stock. For instance, assume an investor has many shares of Apple in her portfolio. She fears that the price of Apple may drop over the next few weeks but expects it to rebound and continue its upward trend. Instead of selling her shares, she could sell Apple futures contracts to hedge against downward risk. Perhaps another investor has shorted many shares of Apple. He fears a short-term rise in Apple’s price but wants to maintain his short position. He could purchase Apple futures contracts to hedge against upward price risk.
Like most futures contracts, the contract size of a single stock futures contract is a fixed amount of the underlying asset—in this case, shares of stock. Each contract is roughly valued at the market price of 100 shares of the underlying stock minus any expected dividends plus any interest. Unlike most futures contracts, the margin requirement for a single stock futures contract is not a fixed dollar amount but is set at 20% of the price of the underlying for both the initial and maintenance margins. Finally, single stock futures are only traded electronically.
Contract specifications are shown in the table below.
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Single Stock Futures Contract Specifications |
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Contract size |
100 shares |
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Minimum price fluctuation |
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