|There is a new financial product in town and it just might be the ticket for customers looking to hedge some of those weak performers in their stock portfolios. |
On November 8 security futures began trading at OneChicago LLC, a joint venture of the Chicago Board Options Exchange, the Chicago Board of Trade and Chicago Mercantile Exchange Inc.
Security futures are futures on single stocks, narrow-based indices and exchange-traded funds (ETFs), such the DIAMONDS. A list of OneChicago's products can be found here. (www.OneChicago.com) under "products and services".
There is a long list of advantages to using security futures. Security futures can be traded out of both a securities or futures account. Basic margin requirements are 20% of the underlying value of the contract (initial and maintenance margin). That 20% minimum may be reduced for certain types of futures market positions, such as calendar and basket spreads, and for certain offsetting positions in stock options and cash securities, provided the security futures are held in securities accounts.
No uptick is required to short a stock using security futures, and they are a simple directional hedge that do not require picking a strike price. In addition, they are electronically traded using the CBOEdirect matching engine and can be accessed using the CBOEdirect or GLOBEX trading platforms.
And because OneChicago uses a Lead Market Maker, (LMM) system in which market makers are obligated to make continuous, two-sided markets, some of the spreads have been as tight -- and in some cases, tighter -- than for stocks traded on the traditional stock exchanges.
At OneChicago, each single stock futures contract is equal to 100 shares of the underlying security. The duration of all contracts is four months. Upon expiration, investors left holding contracts must take delivery of the underlying shares (or make delivery if they are short). Alternatively, they can "roll" their positions into the next contract month.
Here is one example of how to use security futures. A customer believes the price of XYZ Company's stock is heading higher, but does not want to dedicate the required cash at the moment to buy 100 shares of the stock outright. Through his futures or securities broker, the customer could purchase a OneChicago futures contract on XYZ in lieu of 100 shares of the underlying security. If XYZ is trading at $40 per share, the customer would need to commit about $800 (20% of $40 a share x 100 shares per security futures contract) to satisfy the margin requirement (versus $4,000 to purchase 100 shares of XYZ outright).
Within a four-month time frame the share price of XYZ goes up $5 to $45 and the customer sells his security futures contract. The customer would earn $500 ($5 x 100), excluding brokerage and other fees, on an $800 investment.
On the other hand, if the share price of XYZ goes down $5 to $35 and the customer closes his position, the customer would lose $500.
There are several steps a broker must take to be able to offer security futures to clients regarding registration, continuing education and other regulatory-related issues. Please contact the compliance officer in your firm for details or contact OneChicago's Marty Doyle, [email protected] or Dan Carrigan, [email protected].
For more information about single stock futures, please click here.
Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options. Copies of this document are available from your broker or The Options Clearing Corporation, 400 S. LaSalle Street, Chicago, IL 60605. CBOE and Chicago Board Options Exchange are registered trademarks of the Chicago Board Options Exchange, Incorporated. 2003 Chicago Board Options Exchange, Incorporated, All Rights Reserved.
There is a new financial product in town and it just might be the ticket for customers looking to hedge some of those weak performers in their stock portfolios. On November 8 security futures began trading at OneChicago LLC, a joint venture of the Chicago Board Options Exchange, the Chicago Board of Trade and Chicago Mercantile Exchange Inc. Security futures are futures on single stocks, narrow-based