Security futures are futures contracts in which the underlying is either an individual stock, a narrow based index, or an exchange traded fund (ETF). Single stock futures contracts usually have the deliverable of 100 shares of stock on a set date in the future. Since these securities have lower margin requirements than trading stock, security futures offer investors with a high level of risk tolerance and an increased ability to leverage themselves within the market. Trading security futures offers:

• A 25% Margin Requirement to trade security futures at optionsXpress as compared to a 50% requirement with stocks
• The ability to sell short on a downtick^*
• The ability to sell short without locating shares^*

To illustrate the potential benefit of reduced margin requirements, consider an investor who is interested in purchasing 100 shares of Google.

Current Quote GOOG @ $290.50

Purchase:

100 Shares of Google - $14,525.00 margin requirement (100 * 290.50 * .50)

1 Futures Contract on Google - $7,262.50 margin requirement (100 * 290.50 * .25)

With Google trading at $290.50, an investor would need $14,525 to purchase 100 shares on margin. Contrast this with the requirement of only $7,262.50 to purchase one Google future contract. The investor could control the same amount of shares by owning the future at half the price of margining the stock.

Furthermore, security futures allow customers to establish short positions without the hindrances of selling stock short. When selling security futures, an investor is not required to wait for an uptick in the underlying stock price or to borrow shares of the underlying stock. By eliminating these obstacles, security futures allow the investor to potentially initiate positions with greater ease than when trading individual stocks.

Although security futures provide potential opportunities, unlike stock, security futures do not pay cash dividends or convey voting rights. Also, investors need to be aware that lower margin requirements may lead to greater potential risk in a fast moving market.

Pricing of Security Futures

Security futures prices generally follow the theoretical formula:

Futures Price = Underlying stock price x (1 + annualized interest rate - dividend)

The security futures contract usually trades at a premium to the underlying stock because of an adjustment for interest rates. This premium is the result of the interest earned on the capital saved by not posting the full value of the underlying stock. As a result, the security future trades at a higher price as compared to the stock.

There are instances when the security future trades at a discount to the underlying stock. Since holders of futures contracts are not entitled to collect dividends, the price of the security future must be adjusted downward by the present value of dividend payments that are scheduled prior to expiration. When a large dividend payment is forthcoming or when the underlying stock is difficult to borrow, the security futures price may trade at a discount to the actual cash price of the underlying stock.

View a detailed list of available security futures.

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