The Tycoon Report

Another Better Way To Buy Stocks!

You’ve read in these pages about the advantages of using options as an alternative to buying stocks outright, and with good reason. I’d like to offer you another alternative that has many of the same advantages as options – but may be easier to understand and doesn’t involve a single Greek term - Single Stock Futures. (What the………….??? – it sure sounds Greek to me!)

Simply put, a Single Stock Future is a contract to buy (or sell) 100 shares of a particular stock (or ETF) and they’re traded on the all electronic OneChicago Exchange. Rather than put up 100% of the cost of a stock (or 50% in the case of a margin account) you have to put up a “margin” amount of just 20%. So if you want to buy Microsoft and it’s trading at $25 a share, a contract to control 100 shares will cost you $ 500 ($25 x 100 shares x 20%). And with that contract comes the distinct privilege of realizing the same dollar for dollar profit (or loss) that you would if you paid all cash for the stock! So here is how you guarantee yourself a better return using a Single Stock Future over an outright cash purchase. If you have $2500 to invest and you’re eyeing a $25 stock, instead of paying all cash, you simply by one Single Stock Future, put up $ 500, and place the rest in an interest bearing account. Now you make the same profit as you would have had you paid all cash, plus you make a little interest on the remaining $2000! See, now wasn’t that easy? And if you bought on a hot tip and failed to do your homework and just happen to take a loss on your position, your loss will be reduced by the amount of interest you’ve earned.

The really nice thing about Single Stock Futures is the ability to “sell short” just as easily as going long. No need to “borrow” shares or pay any fees for the privilege of borrowing, no “up-tick” rule to be concerned with, (if it ever becomes reinstated), and it costs the same 20% margin.

You can purchase a SSF as far as 9 months in the future (they generally offer 3 quarterly and 2 serial contract months), but they need to be treated a little differently than a stock position. They actually trade like a futures contract (oh no, you’re scaring me now!) and they have an expiration date (just like a carton of milk), but a little forethought should keep you out of trouble. They turn in to a long or short position at expiration, but if you trade for the shorter term as I do, you simply offset your position prior to expiration. (Just like options) They can be traded from either an equity or a futures account, so you don’t necessarily need to open a new account somewhere. It’s best to check with your particular broker about their arrangements, but don’t be too surprised if you get short pause on the other end of the line – a lot of brokers aren’t familiar with them yet.

OneChicago offers SSF’s on approximately 1200 stocks (primarily large caps) and about 70 ETF’s, and they cover nearly every sector.

What I like to do is check out Teeka Tiwari’s Sector Hunter to find the strongest and weakest sectors, find stocks or ETF’s that are offered in those sectors, and take short term positions. I also take Chris Rowe’s good advice and keep some exposure to both sides of the market.

There are numerous other advantages to using Single Stock Futures that perhaps I can expand on in a future article. For example, sometimes you can buy a SSF at a price below the current stock price, so you’re effectively buying stock at a discount. I like to use them with options to create a consistent and very low risk (but above average) return, month after month.

Hopefully, this will whet your appetite a little and at least have you checking out the possibility of including Single Stock Futures as part of your investment portfolio. They are well worth the time to explore.