If you’ve been trading for any length of time, you’ve probably run up against your margin limits. That is to say, you’ve probably found yourself wanting to buy more stocks than your margin will allow.
It turns out that there’s actually a simple, effective solution for increasing your available margin. That solution is to use Single Stock Futures, or SSFs.
Although it may sound exotic to trade a future on a stock, actually it is very simple in its implementation. Often you can trade Single Stock Futures through your existing brokerage account if you have access to Globex.
Single Stock Futures have two very important advantages that make it worth learning how to use them. The first advantage is that the margin requirement of Single Stock Futures at OneChicago.com, the main Stock Futures Exchange in the USA, is only 20% instead of 50% for the underlying stock. This means you could trade five times the cash in your account using Single Stock Futures. Of course, usually you don’t want to get anywhere near that, because leverage cuts both ways. You can find yourself losing money five times faster than you would with a cash account if you were leveraged all the way with Single Stock Futures.
The other advantage to Single Stock Futures is that you can short a stock without needing to wait for an uptick. This is a definite advantage because you can short a stock any time, even if it is already going down steeply.
Now, what are the disadvantages to Single Stock Futures? The first disadvantage is that liquidity in Single Stock Futures can be low. This usually means there will be a significant spread between the bid and the ask. For many Single Stock Futures, the underlying stock has a bid/ask spread of a penny or two. With Single Stock Futures, it is usually many pennies and in some cases, if you’re doing very short term trading, you will definitely want to keep in mind that the bid/ask spread eats into your profit potential. So, always consider the bid/ask spread.
The bid/ask spread will also vary by contract expiration month, so be sure to shop around for the best contract expiration month for what you have in mind.
Another disadvantage to Single Stock Futures is that they’re not available for all stocks. Currently, as of March, 2007, there are nearly 500 stocks for which you can trade the Single Stock Futures. Be sure to check to see if there is an SSF available for your selected stock picks. If so, you have a low margin way to trade it.
One final disadvantage with Single Stock Futures is that when the futures contract expires, you will be left with the underlying stock. If this is not what you intended, be sure to close out your position, whether long or short, and go flat before the expiration for the Single Stock Future is upon you.
So, if you are looking to make your money work harder for you when you trade stock picks, be sure to check out Single Stock Futures. You may find that your profit potential increases dramatically if you can use the high leverage of Single Stock Futures instead of buying or trading the underlying stock.
Doug Newberry is the founder and Director of the Investing Systems Network, which has more than 20,000 customers using its tools and services. These customers, who come from more than 70 countries, are interested in becoming better, more disciplined investors. To find out more about trading with Single Stock Futures, go to Stock Picks.
Source: www.isnare.com
