Unlimited Trading Opportunities: Long and Short
The high volatility of the underlying issues will create dramatic opportunities for gains in the SSF market. Unlike stocks, however, which are limited by the number of outstanding shares available, new futures contracts are created as interest swells.
An additional bonus for SSF traders is shorting a single stock future is simple. Unlike in stocks, they are not hindered by the uptick rule, or the need to borrow shares, which may be limited. Short sales on SSFs simply create more open interest without need to go to a securities lending department to borrow shares of a stock. As a result, the advantages are that you can short on an uptick, not worry about whether the SSF is available for shorting, and you can avoid paying the lending rate on short sales.
Wide Range of Trading Strategies
Any futures contract is viable for only two reasons: Speculation and Hedging, and the SSF market will be no different. In fact, the most exciting opportunities in this market occur with the well-defined relationships certain stocks have vs. each other, and the potential to offset risk.
One of the most powerful phenomenons in the market over the last several years has been indexing. The Vanguard S&P500 fund is the worldâs largest. Whatâs interesting is that simply meeting the index for performance is seen as a major victory.
There are two major disadvantages to indexing as I see it. First, when issues are indexed, the large run-ups that occur in issues on the day they are indexed forces those prices into the index at a premium, which will very quickly be worked off. Secondly, several stocks in an index can have a dramatically negative effect on the index as a whole. I will use the following example, provided by Nasdaq Liffe, to demonstrate.
The S&P499. Tyco was one of the worst performing issues in the S&P500. When Tyco was trading at $14.17 and the SPY was at $85.04, the .362% weighting gives us 2.17 shares of Tyco. Given this, 4602 SPY equities shares can be traded long against 1 TYC futures contract short. What is the advantage of doing this? Well, as we all know TYC was one of the worst performing issues in the S&P, but by removing it from the index we can achieve a relative performance boost. The index lost 19.33% with TYC, but only 18.92% if TYC was removed. While this still results in a loss, for those who must have exposure to equities at all times, this example should show how removing the weaker shares would yield benefits.
The above strategy is ideally suited for longer-term equities players, but what do SSFs offer to shorter and intermediate term traders? I feel that the best opportunities will occur in equity spread trading. The NQLX selection algorithm, for example, specifically looked to include stocks that would be ideally matched for pairs trading. Equity spreads tend to be very trendy as they reflect longer-term competitive advantages within an industry. This is where short-term traders can step in and profit. Two companies like AMAT and KLAC, for example, compete in the same industry and there is a natural relationship based upon the competitive advantage one company enjoys over the other. This relationship is dynamic and always changing, but tends to trend very well.
Resources
For more information on trading single stock futures, I would strongly urge you to check out the following sites, from which the information for this article was compiled:
Nasdaq Liffe
http://www.nqlx.com/
One Chicago
http://www.onechicago.com/
Brandon
DISCLAIMER: Trading futures involves the risk of loss, including the possibility of loss greater than your initial investment. Stock futures may not be suitable for all investors. Consult your broker or financial advisor before trading.
