Trading Single Stock Futures Single stock futures are futures contracts based on individual stocks. These contracts are agreements between two investors to buy or sell, at a future date, a specific quantity of shares at a certain price. For more than 18 years, single stock futures were banned because the regulatory agencies that oversee the futures and securities industries could not iron out their differences and develop suitable regulation for the investment tool. An act of Congress, called the Commodity Futures Modernization Act, in late 2000 ended the ban that kept single stock futures from trading on the American exchanges. It paved the way for the development of this new investment tool and single stock futures began trading in November 2002. There are differences between the stock market and single stock futures. When you buy a company’s stock you are actually purchasing a share of ownership in that company. However, when you go long or short a futures contract, you are entering into a contract to buy or sell the underlying instrument in the future at a predetermined price. As the price of the underlying instrument moves you will make or lose money. All specifications except for the number of contracts to be bought or sold are standardized. Every futures contract is carefully defined in terms of size, quality, quantity, delivery location, and delivery date. One of the main differences between single stock futures and other futures contracts is the margin rule. The CFTC and the SEC blended industry standards in the final margin rules, which were approved on August 2, 2002. In a nutshell the margin level for outright positions in single stock futures is 20 percent of “current market value,” or the daily quoted settlement price of the security future. An example would be if IBM was trading at 80.00 the value of a single stock futures contract would be $8000.00 (80.00 x 100 shares). The margin would be $1,600 (8,000 x .20). Traditional futures margins are anywhere from 2 to 20 percent. This margin requirement was set as a compromise between the two industries so neither industry would have an advantage in the investment tools used in both industries as a risk management vehicle. Pricing of Single Stock Futures In theory, the price of a single stock futures contract should equal the value of the underlying stock plus the interest rate less dividends, calculated over the life of the futures contract. It is a similar method to how the S&P contract is priced. In trading the single stock futures I have found it easy to just look at the closing price of both instruments and average the spread. About 10 days of data will give you a pretty good idea where the spread is. Keeping track of this spread will then help you to place your orders. Liquidity Another concern in trading single stock futures is liquidity. The exchanges, NQLX and OneChicago, have created “market makers” to handle orders and this will guarantee market liquidity. Market makers agree to take the opposite side of customer orders and to maintain a certain bid/ask spread for their single stock futures. Knowing the spread will help the customer from over paying on a trade if limit orders are used. Single stock futures and the Tortoise Trades System The Tortoise Trades System is applied to the stock market prices. When a trade is generated, an order is entered in the single stock futures market. Price triggers are watched in the underlying stock to determine when to take action in the single stock futures market. Trading single stock futures is an excellent market for traders with smaller accounts. The risk per trade are usually between $100 and $300. Trade one contract until you get use to the spread difference between the underlying stock and the single stock futures. The closer the spread the less "slippage" there tends to be in orders. 20 cents would be a very high slippage amount. You can see a sample of how the single stock futures trade alert page would look. (Click here).