This:
"Physically settled is way way superior and should be the way its done."
Are cash settled stock futures basically bucket shop betting?
- Thread starter beefcaketrade
- Start date
"Physically settled is way way superior and should be the way its done."
It is. Physically settled stock futures can be made to act like cash settled stock futures by closing the contract near maturity before taking delivery by deadline. Cash settled futures is a one trick pony allowing cash only.
I don't think you've made your point though. I'm not against disagreeing but you have not even made the point why cash settled stock futures are better or at least not worse than physically settled stock futures.
The underlying here is equity. Its not some heavy industrial metal requiring a warehouse and transport. Its not oil stored in an oil tanker. Its not a bunch of heavy bars of gold that need to be transported by armored trucks. Its shares. Its dealt with electronically. This makes it very pointless to be trading 'equity futures' but not have the ability to physically settle the underlying. Stock futures trading on the OneChicago is superior in this aspect compared with other stock futures elsewhere in the world because they do allow you to take or make delivery of the underlying. Huge advantage.
The problem is that no one is going to take the time to explain to you that not all traders make their money on long time frames, trying to "not trigger tax events". And not every strategy wants to be holding stocks for delivery.
Do you get it?
If you want to learn something, you might wanna ask nicely. Then someone might come in and help you out. But, if you think you know everything then its no use to you.
hi beefcake trade -
my guess is that it is simple....
The reason why you have cash settled futures on individual stocks is that the majority of people trading on these dont want physical settlement.
They want the margins (leverage) and low costs (usually its cheaper to transact without stamp duties, and brokerage) they get from a futures contract.
As the futures price is derived from the underlying, then if they want the physical they would simply trade the physical.
Additionally because the futures are exchange settled you are not trading with a bucket shop but a central clearing house with multiple participants and 'competitive' pricing - so that comparison to a bucketshop is a little unfair.
In this respect the headaches associated with actual or potential physical delivery are not worth it for the majority of players, and while you are correct having an extra choice might be beneficial, for the vast majority of participants its not.
Simple supply and demand for a product is probably the answer.
my guess is that it is simple....
The reason why you have cash settled futures on individual stocks is that the majority of people trading on these dont want physical settlement.
They want the margins (leverage) and low costs (usually its cheaper to transact without stamp duties, and brokerage) they get from a futures contract.
As the futures price is derived from the underlying, then if they want the physical they would simply trade the physical.
Additionally because the futures are exchange settled you are not trading with a bucket shop but a central clearing house with multiple participants and 'competitive' pricing - so that comparison to a bucketshop is a little unfair.
In this respect the headaches associated with actual or potential physical delivery are not worth it for the majority of players, and while you are correct having an extra choice might be beneficial, for the vast majority of participants its not.
Simple supply and demand for a product is probably the answer.
But physically settled stock futures can also be settled in cash if you just manually offset the contract before expiration. This is why many people can trade the gold GC futures on the comex, but the majority don't take delivery and manually close out contracts and roll over the next contract. Yet, you could take delivery if you wanted to. COMEX fully allows for you to take delivery if you want.
With some futures brokers like IB, they let you trade commodity futures but don't let you take physical delivery obviously because they don't want to deal with the logistics, and so they help you close out the contracts before expiration if you have not done so yourself in compliance of this requirement.
Not all futures exchanges act like bucket shops. The COMEX and their commodity contracts are physical settlement. The OneChicago allows physical settlement of shares. Its just a few of the futures exchanges in asia that are 100% cash settled.
There are importance to having futures contracts lead to physical settlement as a contractual term. Otherwise its possible the price action diverges from the underlying. The futures market is a separate market. Futures track the price of the underlying because of arbitrage opportunities that leads to traders making trades that link the otherwise separate exchanges. The price of a futures contract is expected to converge to the price of the underlying at expiration.
If the futures contract is not physically settled, its possible the price of futures stop tracking the underlying. Imagine at expiration date, you buy the futures on that date right before the close, you should expect the price to be basically similar to the cash market, because after the market closes it leads to immediate delivery of the underlying in physically settled futures. It would not make sense to be a large price gap between futures and cash market at the expiration point. But if futures are cash settled, there is no reason why the futures need to be priced at the cash price. They can trade that in a different direction and it wouldnt make a difference to anyone. There is no arbitrage opportunity for anyone to fix the mis-pricing.
I think you probably have it the other way around. (if I am reading you right)
Cash settled means it is more likely to attract arbitrage to keep it in line.
The reason being is there is less hassle to involve delivery. Its settled in cash between two accounts. End of story. The risk ends on expiry time, and physical delivery adds another risk for many - a risk they dont want to take.
Whereas in physical delivery markets you often get last day futures squeezes as people cant delivery or take delivery, and they costs of rolls seem prohibitive and so they have to close out.
I would love to find a cash settled futures market that trades on expiry day a long way from its underlying 'cash settlement price' - dont you think that would be free money?
Trading is zero sum activity. Therefore, the instrument is a irrelevant as it does not change the nature of the activity.
Therefore the debate about stocks vs. futures for the purpose of trading is pointless.
Therefore the debate about stocks vs. futures for the purpose of trading is pointless.
I'm saying that there is no arbitrage opportunity to keep prices in check, if there is no physical delivery requirement. The futures market is a separate and independent market to the equities market. Since it is cash settled futures, at expiration date, the price can basically stay flat and not move anymore. Who cares, its settled in cash. Who cares that the underlying moves 50% in either direction. There is nothing tangible to force the futures to trade with the underlying anymore. This is not the case if it is physically settled. If the underlying moves 50%, and its physical settlement date, then there is massive arbitrage opportunities if the futures does not track the underlying. Because at the end of the day, somebody has to make that delivery of the underlying, which means there is every reason to track the underlying.
Imagine if the options market is not physically settled either. Thats just a ridiculous instrument if that is the case. The fact the options market is physically settled makes it a powerful and useful instrument.
There are cash settled stock futures. Trade the asian stock futures. They are all cash settled.