Equity Index Futures Trading
Overview
Equity index futures are designed to trade in relation to a specific equity index or ETFs (Exchange Traded Funds) which are comprised of a basket of securities that trade as smaller versions of the index or ETFs. These products allow our clients to participate in basket of equities without having to purchase to full margin value of single equity securities.
We believe the unique combination of many of the best features of other investments presents financial opportunities for both institutional and professional clients, including:
- Tax efficiency
- Lower Capital Gains Tax
- Advantages of Stocks & Mutual funds combined
- Lower Margin costs
- Lower Commissions vs. Equities
- Highly Liquid Investments
- Transparency
- 24-Hour Trading
- Hedging
- Portfolio Diversification
- Cash Management
- A wide array of investment strategies
In recent years, these unique features and benefits have helped equity index futures explode in popularity and emerge as one of the most flexible, multi-purpose investment products available.
Please note that the following descriptions contain statements of opinion and should be recognized as such.
Tax Efficiency
Equity Index Futures offer greater tax benefits because they generate fewer capital gains due to tax structure of futures products vs. equity products. Additionally, investors are not required to sell securities to meet cash redemptions or potentially generating capital gains tax liability. Keep in mind that the sale of an equity index future contract will generate capital gains/losses for the investor liquidating. An investor can also sell a security that is underperforming and claim a tax loss but retain exposure to its sector by purchasing an equity index future contract (please consult your tax advisor about a tax loss strategy).
Lower costs
Commission expenses can have a significant impact on returns for investors. In general, equity index futures, have significantly lower commissions than their equity/ETF counterparts. And, since they trade as a single futures product, they are insulated from the costs of having to buy and sell securities to accommodate shareholder purchases and redemptions.
Transparency
Equity Index Futures are designed to generally replicate the holdings and correspond to the performance and yield of their underlying index and its basket of securities.
Highly Leveraged & Liquid Investments
Equity Index Futures can be:
- bought and sold nearly 24-hours a day
- purchased with high leverage
- sold short, even on a downtick (unlike common stocks)
- traded using stop orders and limit orders, which allow investors to specify the price points at which they are willing to trade.
Diversification
Because each equity index futures contract represents a basket of securities, it inherently provides diversification across an entire index. Equity Index Futures cover virtually every segment of the equity market, providing an easy and convenient way to adjust the investment mix of a core portfolio.
Hedging
Equity Index Futures can be purchased, highly leveraged and sold short (even on a downtick), which has opened up risk management strategies for individual investors that were once available only to large institutions. For example, they can be sold short to hedge a core stock portfolio or interest rate fluctuations. This allows investors to keep their portfolio intact while protecting them from market losses. In a declining stock market or rising interest rate environment, profits from a short position can offset some of the losses in a portfolio.
Cash management
Equity Index Futures have often been used to “equitize” cash, providing a way for investors to put cash to work in the market or maintain allocation targets while determining where to invest for the longer term.
Wide array of investment strategies
Investors can capitalize on the convenience and flexibility of equity index futures to pursue a wide variety of investment strategies.
Single-Stock Futures (SSF)
Overview
vCap Futures provides Single Stock Futures (SSFs) to its institutional and professional clients for hedging and speculating needs. SSFs include some of the most popular and actively traded stocks in the U.S., such as Microsoft, Pfizer, General Electric, IBM, Citigroup, AOL Time Warner, and Johnson & Johnson.
Single stock futures values are priced by the market in accordance with a theoretical pricing model based on a formula:
Futures Price = underlying stock price x (1+ annualized interest rate – dividend)
All SSFs contracts have expirations dates. There are three basic approaches for managing the expiration of SSF contracts:
- Offset your position
- Wait until the contract expires, then make or take delivery
- Roll the position over from one contract month into the next
SSFs vs. Futures
SSFs are futures contracts on individual stocks and are agreements to deliver 100 shares of a specific stock at a designated date in the future or expiration date. The buyer has an obligation to purchase shares of stock and the seller has an obligation to sell shares of stock at a specific price at a specific date in the future. Single-Stock Futures contracts are completed via offset or the delivery of actual shares at expiration.
Security Futures Order Types
Two order types – All-or-None (AON) and Immediate-or-Cancel (IOC) – are unique to single-stock and narrow-based index futures. However, exchanges offering security futures also accept other orders, such as market, limit, stop, stop limit and stop with limit.
- All-or-None (AON): This order type specifies both a quantity and price. The order will be filled only if the entire quantity can be filled at the specified price. Thus, no partial quantities will be filled.
- Immediate-or-Cancel (IOC): An IOC order will be presented to the market, filled to the extent possible, and then immediately cancelled. Thus, you may receive partial fills on an IOC.
Advantages
Single-Stock Futures offer our institutional and professional clients the following advantages:
- With margin requirements of 20%, single stock futures provide a highly capital efficient way to participate in equities.
- No uptick rule for short sales
- Greater leverage
- Eliminates efficiencies inherent in the stock loan process
- Opportunity for improved cash flow
- Cleaner hedge relative to options
- Potential tax benefits
