Single stock futures (SSFs) have fundamentally changed the landscape of derivative trading globally, by allowing investors to easily and with minimum capital hedge their portfolio and exploit market opportunities to achieve maximum returns on their investment.
South Africa currently hosts the largest SSF market in the world, trading on average 700,000 contracts daily. The SSF trading market in South Africa is hosted by the JSE’s Equity Derivatives Market, formerly known as SAFEX, which, when established in 1999, offered four leading shares. Today it covers more than 200 counters.
SSFs are a legally binding agreement (an exchange-traded contract) based on an underlying stock. This futures contract gives the holder the ability to buy or sell the underlying asset at a fixed price on a future date. Being futures contracts they are traded on margin, thus offering leverage. When purchasing SSFs there is no transmission of share rights or dividends. If you hold an SSF until expiration you either have to take delivery or make delivery of the underlying instrument – or you have to roll over the position into the next dated futures contract for the same underlying instrument.
Why SSFs?
As with any investment, the higher the risk, the greater the reward could be. SSFs are no exception to the rule. Due to the high degree of leverage in SSFs, both profits and losses are felt immediately as they are realised on a daily basis. Therefore, although the potential to earn significant returns on your investment is impressive, you may also incur severe losses. So why use them?
· Impressive hedging capabilities: You are able to fully exploit market movements by selling short in falling markets and buying long in rising markets.
· High capital efficiency: They are highly geared investments giving exposure to a large amount of underlying shares for only a small initial deposit.
· Low brokerage costs: SSFs incur lower brokerage costs as opposed to trading in the underlying shares directly.
· High liquidity: SSFs are easily traded using online platforms.
· Earn interest: With SSFs your initial margin earns interest for the duration of the contract.
· Benefit from corporate actions: Corporate actions that affect the underlying share are also taken into account in pricing SSFs.
· Diversified risk: With SSFs you are able to leverage your funds on a number of investments due to the low cost of trading with SSFs, making them one of the cheapest ways of diversifying your investment risk.
· Protect your portfolio: Hedge your risk by selling SSFs in the same companies.
· Benefit from pairs trading: By entering one long and another short position into a trade in the correct ratios, you can realise a net positive profit. A pair trade creates a hedge against the market, i.e. if the market corrects, your losses on the long side are offset against your profits on the short side.
Who uses SSFs?
Some of the most successful traders use SSFs religiously. An SSF contract is arguably one of the most effective ways of hedging and diversifying capital risk cheaply. Other than the fact that SSFs are also one of the best ways of speculating, they also allow a trader to invest in instruments not easily available for normal equity trading, like JSE indices, oil and gold.
Local traders can also gain access to about 260 international or IDX futures, including shares such as Apple and Google to name a few. The costs are the same as trading local equity SSF but the main advantage is that it does not affect your foreign investment allowance.
When do you need SSFs?
Many SSF traders have found attractive trading opportunities, especially in falling markets – that’s when they become the most essential and the most useful. However, SSF trading involves the risk of a loss that can exceed your initial investment. SSFs might not be suitable for all investors. This will largely depend on your risk appetite and trading experience.
'We bring you the latest Garden Route, Klein-Karoo, Hessequa news'
