Single Stock Futures (SSF) Essential Guide

 A single stock futures (SSF) contract is a standardized futures agreement where the underlying asset is an individual stock. Although trading in SSFs ceased in 2020 due to a lack of popularity, it remains a legal practice. In the United States, each contract typically represented 100 shares of the associated stock. SSFs continue to be more prevalent and are traded in larger volumes in regions like India, the European Union, and other markets compared to their performance in the U.S.

Pexels.com/energepic.com

SSFs do not grant the holder voting rights or dividends, unlike traditional stocks. They differ from stock options, which offer the right but not the obligation to buy or sell the underlying stock; SSFs mandate a stock transfer or its cash equivalent upon contract expiration. The following sections explain the trading process for SSFs, their introduction and eventual discontinuation in the U.S. market, how traders assess their risks, and how Single Stock Futures (SSF) differ from other financial instruments like stock options.

What Are Single Stock Futures (SSF)?

Single Stock Futures (SSF)  are a type of futures contract that gives the holder the obligation (not the option) to buy or sell a specific quantity of a single stock at a future date. The contracts are standardized, with each SSF typically representing 100 shares of the underlying stock.

SSF contracts are traded on futures exchanges, similar to commodity futures. The price of the SSF contract reflects the expected future value of the underlying stock, considering factors such as dividends, interest rates, and the time until contract expiration.

In finance, a single-stock future (SSF) is a futures contract where two parties agree to exchange a certain number of a company's shares at a predetermined price (known as the futures or strike price), with the actual exchange taking place on a future date, referred to as the delivery date. These contracts can also be traded on a futures exchange after being established.

The Global Market in Single Stock Futures

Trading volumes for SSFs can fluctuate significantly. For instance, global trading volume for single-stock futures increased by 42% in 2021 compared to 2020, but by the following year, it had decreased by 15%. Borsa Istanbul in Turkey, the Korea Exchange, and the National Stock Exchange of India (NSEI) are typically leaders in global SSF trading volumes. In February 2024, these exchanges recorded trading volumes of approximately 159 million, 90 million, and 35 million contracts, respectively. ICE Futures Europe and the NSEI often rank highest in terms of notional value.

It's not uncommon for SSFs to experience significant fluctuations in trading activity. Two major platforms, ICE Futures Europe and the Johannesburg Stock Exchange, often see trading volumes surge or drop by millions within a single month.

SSF Mean Stocks?

An Single Stock Futures (SSF) option is a financial instrument that grants the holder the right, but not the obligation, to buy or sell a single stock futures (SSF) contract at a predetermined price. The seller, or writer, of the option grants this right in exchange for a premium paid by the buyer. There are two main types of options: calls and puts.

• Call Option: The buyer of a call option acquires the right to purchase an SSF at a fixed price, expecting the stock's price to rise above the strike price by the option's expiry to profit from the position. The seller of the call is obligated to deliver the SSF at the agreed price if the option is exercised.

• Put Option: Conversely, the buyer of a put option has the right to sell an SSF at a fixed price, anticipating that the stock's price will fall below the strike price by the time of expiry, thereby gaining from the option. The seller is obligated to buy the SSF at the set price if the option is exercised.

SSF options are typically American-style, meaning they can be exercised at any time before expiration, unlike European-style options, which can only be exercised at expiration.

Meaning of Single Stock Futures Contract (SSF)

Like all futures contracts that are not settled in cash, SSFs require the buyer to take delivery of the underlying asset when the contract expires. In the case of SSFs, the underlying asset is typically 100 shares of a specific stock per contract.

Traders use futures contracts to hedge against or speculate on price changes in the underlying asset. For example, a corn producer might use futures to secure a specific price, thereby reducing risk, while others may speculate on corn prices by taking a long or short position in futures contracts. SSFs function similarly, but instead of commodities or indices, the underlying asset is an individual company's stock.

In the United States, SSFs were banned for an extended period due to jurisdictional disputes between the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) over who should regulate them. The Commodity Futures Modernization Act of 2000 eventually legalized SSF trading, placing them under the joint oversight of the SEC and CFTC. After further legislation reduced trading fees, exchanges began offering SSFs in 2002.

Initially, expectations for SSFs were high. A Bloomberg article highlighted the excitement among traders in Chicago and New York, although it also warned that inexperienced investors might create a speculative bubble. However, these fears proved unfounded, as SSFs did not attract a significant influx of traders.

Trading in SSFs continued until 2020, when the last U.S. exchange offering them, OneChicago, closed, ending SSF trading in the country. By then, awareness of SSFs among American investors remained low, regulatory challenges persisted, and investors had become accustomed to using options and other financial products to hedge or speculate on individual stock prices. Although SSFs are still legal, they are currently unavailable until an exchange decides to reintroduce them.

Conclusion

SSF is a derivative financial instrument that allows traders to speculate on the future price of individual shares without needing to own the underlying shares. These contracts provide leverage, allowing traders to control large positions with a relatively small capital investment. SSF can be used for both speculation and hedging, allowing investors to take long or short positions to take advantage of anticipated price movements or protect themselves against potential portfolio losses.

While SSFs offer advantages such as flexibility and leverage, they also carry risks associated with futures trading, including the possibility of large losses. Therefore, SSF is generally used by experienced traders and investors. In the US, SSF trading ended in 2020 when the last exchange offering it exited the market. SSF remains traded in various parts of the world, with the largest volumes in Türkiye, South Korea and India.