Security Futures Overview

Single stock futures (SSF) are futures contracts on individual stocks. OneChicago lists futures on more than 85 well-known stocks such as IBM, Qualcomm and Microsoft. In late 2000, the U.S. Congress passed legislation lifting the ban on these products, which were already trading in Europe and elsewhere.

A OneChicago single stock futures contract is an agreement for delivery of shares of a specific stock at a designated date in the future, called the expiration date. The size of a OneChicago single stock futures contract is 100 shares of the underlying stock.

Narrow-based indexes are futures contracts on small groups of stocks that allow an investor to take a position in a concentrated area of the equities market. OneChicago offers futures on Dow Jones MicroSector IndexesSM which each contain 5 stocks in a focused industry sector such as Aerospace, Banking, Biotechnology and Semiconductors.

ETF Futures are futures contracts on Exchange Traded Funds. They have similar characteristics to single stock futures, although the underlying security is the fund itself rather than common stock in a specific company. Thus at expiration, the deliverable assets are shares in the underlying ETF.

Advantages of Single Stock Futures

1. With margin requirements of 20%, single stock futures provide a highly capital efficient way to participate in equities
2. No uptick is required to establish a short position
3. Short sellers may benefit from eliminating the costs and inefficiencies associated with the stock loan process

Advantages of Narrow-Based Indexes (including MicroSectors)
Using these indexes, investors can take a long or short position in a concentrated basket of stocks without incurring multiple transaction fees. This structure allows difficult-to-execute or advanced investing strategies such as spread trading or sector rotation to be executed swiftly and cost efficiently, as MicroSectors are also subject to a margin requirement of 20% of the cash value of the contract.

Range of Trading Strategies
Single stock futures are used with a broad range of trading strategies and can be applied to a variety of portfolio management needs. Since the price of an equity future typically tracks the price of the underlying instrument nearly tick for tick, trading strategies used in the stock market today should be transferable to the stock futures market.

Electronic Trading
Security futures trading at OneChicago is fully electronic. Trade processing and clearing are fully automated using state of the art technology.

Hedging Positions

Substitution and Hedging in Individual Accounts

• Basic hedging: After large price gains, an investor may anticipate that a stock will trade sideways for a time. Rather than selling the position, the investor could hedge by selling single stock futures. This strategy protects against price depreciation, while preserving ownership rights of the underlying position
• Fine-tune market exposure: Single stock futures could be used to invest in equities that might have more favorable short-term upside potential than an investor's current holdings. Investors may fine-tune their market exposure using security futures without changing the composition of their cash equity portfolio
• Hedge Employee Share Holding Plan positions in company stock until the next selling period: Covenants in benefit plans sometimes prevent the selling of equity holdings except during prescribed periods. Individuals can use SSFs to hedge their exposure to company stock until the next selling period
• Hedging a diversified portfolio: Investors can increase or decrease their level of exposure to the overall market with futures contracts on an ETF that tracks a broad-based index such as the DJIA or S&P 500. A short ETF futures position may thereby provide a broad and cost-effective hedge against the impact of market movements on a diversified portfolio.

Volatility Hedging

Anticipated and unanticipated corporate events such as earnings announcements, FDA rulings, mergers and acquisitions, and regulatory actions can trigger volatility. Suppose an institution is long a technology index futures contract and one of the companies in that index is scheduled to release its earnings after the close. That company's price volatility may increase after the release. Rather than selling the index and relinquishing the potential benefits from favorable price movements, a more cost-effective alternative is to sell the SSF on that company's stock in the amount it is represented in the index investment. This strategy hedges the expected volatility in the index in the near-term.

Interest rate volatility example: Consider the example of an investor with a portfolio of stocks for which prices have been historically sensitive to interest rates, such as in certain sectors of the financial services industry. Prior to an important economic announcement (e.g., the unemployment rate), the investor might sell a MicroSector future in that industry to hedge the position from short-term volatility on the morning of the economic announcement.

SINGLE STOCK FUTURES LISTINGS
Last Updated on November 26, 2003