The Exchange. for Single Stock. Futures SM

Transcription

1 The Exchange for Single Stock Futures SM

2 Who is OneChicago? OneChicago is a fully electronic exchange committed to being the global leader for trading security futures. OneChicago Live The Exchange is a joint venture of IB Exchange Corp. and the world s premier options and futures exchanges: the Chicago Board Options Exchange (CBOE ), Chicago Mercantile Exchange, Inc. (CME ) and the Chicago Board of Trade (CBOT ). OneChicago has been designed to meet the expectations of investors and traders by providing several distinct advantages: Lead market makers: At the heart of OneChicago s market structure is a unique Lead Market Maker (LMM) system. Most contracts are assigned an LMM* that has been selected based on their ability and commitment to make continuous two-sided markets. In addition, the Exchange s block trade and Exchange of Future for Physical (EFP) facility provides additional opportunities for participants to trade at OneChicago. Courtesy of E-Signal Inc. Market quotes for contract months for OneChicago SSF and ETF futures. Speed of Execution and Anonymity: As an all electronic exchange, OneChicago can provide market participants with point and click WYSIWYG (What You See Is What You Get) execution. OneChicago is fully automated and provides traders with straight through processing that routes, matches and reports electronically. This results in more accurate and faster order execution and fills with complete anonymity. Easy trading access through existing accounts: Many investors can route their orders to OneChicago using their existing accounts and trading software (providing that your broker is prepared to offer security futures). This is because OneChicago s products can be traded from either securities or futures accounts. Brokers connected to the Exchange through CBOEdirect or GLOBEX already have access to trade at OneChicago. *Non-standard contracts are not assigned to LMMs and thus may not have two-sided quotes

3 OneChicago at a Glance Innovative Products Transparent Markets Unique Product Benefits Hundreds of single stock futures Futures on ETFs Trade from securities or futures account Continuous two-sided markets WYSIWYG "what you see is what you get" execution Fully electronic trading with state of the art technology Opportunity for better financing both long and short Leverage from lower margin requirement No uptick required for short selling Single Stock Futures Standard Contract Size 100 shares of underlying security (certain ETF Futures = 1000 shares) Tick Size $.01 Margin Requirements Regular Trading Hours Expiration Months Last Day of Trading Delivery Day Short Sale Advantages Clearing and Settlement U.S. Government Regulator Initial and maintenance margin requirement of 20% of the cash value of the contract (whether long or short) or lower with applicable offsets Futures on Single Stocks: 8:30 A.M. 3:00 P.M. Central time Futures on DIAMOND ETF: 8:30 A.M. 3:15 P.M. Central time Standard contracts are listed for up to 4 months. OneChicago follows the quarterly cycle of March (H), June (M), September (U), and December (Z). Serial months traded are the two nearest months that are not quarterly expirations. For specifics on contracts traded visit Last day of trading and expiration on third Friday of the contract month Physical delivery on the third business day after expiration (typically Wednesday) No uptick rule No stock borrowing costs or risks Trades executed at OneChicago are cleared and settled by The Options Clearing Corporation ( or by Chicago Mercantile Exchange Inc. ( OneChicago is jointly regulated by the Commodity Futures Trading Commission ( and the Securities and Exchange Commission ( *Subject to revision. Please see for the most up-to-date information.

4 What are single stock futures (SSFs) and ETF futures? Single stock futures (SSFs) are futures contracts on individual stocks or Exchange Traded Funds (ETFs). OneChicago currently lists futures on hundreds of well-known stocks such as IBM, Qualcomm and Microsoft and futures on the DIAMOND ETF. These and other security futures products at OneChicago provide investors with cost effective vehicles for participating in U.S. equities markets. A OneChicago single stock futures contract is an agreement to purchase shares of a specific stock or ETF at a designated date in the future, called the expiration date. The standard size of a OneChicago SSF is equivalent to 100 shares of the underlying stock. Most SSFs are not held until expiration since traders often liquidate their position or roll it forward to a future month. When a SSF or ETF future is traded, both the buyer and seller put up a good faith deposit called margin. The margin requirement for security futures is generally 20% of the underlying value of the securities. This requirement may be lower, though, if the investor also holds certain offsetting positions in cash equities, stock options or other security futures in the same account. Consult your broker to see if these are available to you. How does the SSF price track with the price of the underlying security? The price of a SSF typically tracks the price of the underlying stock nearly tick for tick, so trading strategies followed in the stock market are generally transferable to the single stock futures market. SSFs or ETF futures may therefore be used with a broad range of trading strategies and for a variety of portfolio management needs. Single stock futures and ETF futures are priced by the market in accordance with a theoretical pricing model approximated by the following formula:

5 Futures Price = stock price x (1 + (annualized interest rate / 365) x days to expiration) dividend due before expiration SSFs usually trade at a premium to the stock price due to adjustments for the market s borrow/lending rates. The premium reflects the carrying costs of owning the underlying security from trade day to expiration. A second adjustment is made to the SSF contract price to account for the fact that SSF holders are not entitled to collect dividends. The SSF price is discounted by the amount of any expected dividend due prior to expiration. Therefore, the SSF contract may trade at a discount to the actual cash price. Beware that a SSF contract or ETF future may not always trade at the theoretically correct price due to a number of other market factors, such as whether the underlying stock is difficult to borrow for covering short sales. What are the advantages of single stock futures and ETF futures? There are several advantages including: 1. With margin requirements of 20%, single stock futures provide a highly capital efficient way to participate in equities. 2. No uptick is required to establish a short position. 3. Potential for improved financing created by implied SSF pricing (Both long and short). 4. Market participants initiating a short position may benefit from eliminating the costs and inefficiencies associated with the stock loan process. 5. Immediate access to Open Trade Equity (OTE) that is in excess of your maintenance margin. You should be aware that trading security futures involves the risk of loss, including the possibility of loss greater than your initial investment. Security futures may not be suitable for all investors. Consult your broker or financial advisor before trading. For further information, consult the Risk Disclosure Statement for Security Futures Contracts, which may be obtained from your broker or at about/images/sfp disclosure.pdf How are expiration dates managed? All SSF contracts have expiration dates. SSFs expire on the third Friday of the specified contract month or, if such Friday is not a business day, the immediately preceding business day. There are up to three quarterly and two serial expiration months per product class. OneChicago follows the quarterly cycle of March (H), June (M), September (U), and December (Z). There are three basic approaches for managing the expiration of SSFs: 1) Offset your position Prior to expiration, you may offset your SSF by covering (buying back) a short position or selling a long position. You do not have to wait until the expiration date to complete your trade. Example: A trader buys (takes a long position) 2 contracts of XYZ company (equal to 200 shares) that expire in December. To offset the position, the trader would subsequently sell 2 contracts of XYZ of that same expiration month prior to the December expiration date. The trader could just as easily have taken an initial short position by selling 2 December XYZ contracts and then offsetting this position by buying 2 contracts of December XYZ. 2) Wait until the contract expires, then make or take delivery At the expiration of the SSF, holders of short positions are obligated to deliver physical shares of the underlying security on the delivery date, and holders

6 Buying power with $10,000 and $25 stock of long positions are obligated to take delivery of the underlying security on the delivery date. Thus, buying a OneChicago SSF (a long position) and holding it until expiration guarantees your ownership of the underlying security after the expiration date. If you offset your position prior to the expiration date, this process does not apply. Consult your broker regarding its procedures and fees associated with delivery if you are considering holding a SSF contract until expiration. 3) Roll the position over from one contract month into the next If you hold a long position in a given expiration month, you can sell that expiration month and buy the next expiration month. Thus, the position is transferred, or rolled forward, and can be held for a longer period. What kind of investment strategies can be used with equity futures? Many existing strategies used in the stock market today apply to single stock futures. Listed are specific examples of how OneChicago products can provide investors and portfolio managers with an opportunity for capital efficient trading: stock cash account shares No margin Buy 400 shares =$10,000 stock margin account 50% margin Buy 800 shares =$20,000 SSF account 20% margin Buy 20 SSFs contracts Represents 2,000 shares =$50,000 Utilizing Leverage Because SSFs only require 20% margin, they can be used to control much larger positions than securities which must be paid in full or purchased on 50% margin. For example, with $10,000 available to trade, a trader could purchase: 400 shares of a $25 stock in a non margin account 800 shares worth $20,000 in a margin account 20 SSF contracts (equivalent to 2,000 shares of stock) worth $50,000 Long or Short Directional Trades Security futures can be a cost effective vehicle for taking long or short positions in specific securities. Bullish Example: A trader who believes the price of XYZ Company s stock is heading higher could purchase a OneChicago SSF on XYZ in lieu of 100 shares of the underlying security. If XYZ is trading at $40 per share, the trader would need to commit approximately $800 (20% of $4,000) to buy the SSF contract vs. $4,000 to fully purchase the stock, or vs. $2,000 cash plus an interest-bearing loan from the trader s broker for the other $2,000 to purchase the underlying stock on margin. Trading the SSF contract is thereby significantly more capital efficient. Bearish Example: A trader who believes the price of XYZ is heading lower could short a OneChicago SSF on XYZ in lieu of shorting 100 shares of the underlying security. Again, assuming a price of $40 per share, the trader would only need to put up $800 (20% of $4,000)

7 to short the SSF, vs. putting up $2,000 or more in addition to the short sale proceeds and borrowing the stock to short the underlying security. When shorting a SSF contract, the trader does not need to wait for an uptick; the trader may have greater flexibility to enter the market at a targeted price level with a OneChicago SSF. Buy Writes SSFs offer traders who engage in buy/writes (long stock/short calls) a more capital efficient means of executing their strategy. An alternative would be to replace long stock with a long SSF and write calls against that SSF position. The lower margin requirements of the SSF position (20%) make it a more cost effective vehicle for the buy/write strategy. Basic Hedging In some circumstances, investors may wish to reduce the short-term risk of price volatility in their portfolio. Rather than selling their securities, the investor could hedge with SSFs by selling contracts that match the underlying position. This strategy protects against price depreciation, while preserving the equity rights of the underlying position, including the right to receive dividend payments. Fine-tune Market Exposure SSFs can be used to invest in areas that might have more favorable short-term upside potential than an investor s current portfolio or to reduce exposure to areas with less favorable short-term potential. Investors may fine-tune their market exposure using SSFs without changing the composition of their cash equity portfolio. Example: An investor is long an index fund that tracks a diversified portfolio of stocks, such as the S&P 500. The investor wishes to overweight (or underweight) holdings in the Biotech sector relative to the index based on the investor s opinion that short-term prospects for the sector are favorable (or unfavorable). Appropriate OneChicago SSFs can be purchased (or sold) to create the desired portfolio weighting for the sector. Given a margin requirement of 20% for SSFs, this fine-tuning can be achieved in a capital efficient manner without requiring the investor to liquidate holdings in the index fund. Pairs Trading In pairs trading, one firm within an industry is bought while a competitor is simultaneously sold short.this provides an investor with exposure to the relative

8 performance of the two companies with limited exposure to broader market and sector performance. Such strategies are also referred to as market neutral trades. Volatility Hedging Anticipated and unanticipated corporate events such as earnings announcements, FDA rulings, acquisitions, and governmental actions can trigger price volatility. SSFs can be used to hedge against volatility. For example, if a trader is long an index futures contract and one of the companies in that index is reporting earnings, that company s price volatility will most likely increase after the news release. Rather than liquidating the index, a better alternative may be to short the SSF of that company s stock. As a result, the trader is able to maintain the long index position while neutralizing the undesired volatility created by the individual stock. Financing Benefits SSFs have an interest rate built into their price that is determined competitively by numerous market participants, rather than a single broker who can dictate rates. Taking advantage of the benefits offered by SSFs may help you achieve your goals of reducing costs (stock borrow). The following examples highlight the finance benefits of SSFs versus the current world of stock borrow / loan. FINANCING COMPARISON LONG SCENARIO Hold 1 share long of Microsoft for 60 days with 25% of the stock value held in cash as maintenance margin HOLD THE STOCK LONG Hold 1 SSF of Microsoft long (1 contract = 100 shares of stock) 60 days with 20% SSF margin HOLD A LONG SSF Borrowing cost on 75% Leverage Dividends Received During Period = 75% 1 x $26.96 x 9.5% 3 x (60/365) 5 = $-0.32 $0.09 SSF Cost for 2 months (Mature in 60 days) Interest Earned on SSF Margin Balance = $ % 2 x $27.13 x 2.0% 4 x (60/365) 5 = $0.02 Total Stock Finance Cost $-0.23 Total SSF Finance Cost $-0.15 SAVINGS =.08 PER SHARE 1 Borrowed % 2 20% SSF Margin 3 Interest Charged 4 Interest Earned 5 % of Year Note: All transaction costs not included

9 FINANCING COMPARISON SHORT SCENARIO Short 1 share of Microsoft for 60 days with 30% of the stock value held in cash as maintenance margin HOLD THE STOCK SHORT Sell 1 SSF of Microsoft (1 contract = 100 shares of stock) 60 days with 20% margin SELL SSF SHORT Interest Paid on Short Proceeds Interest Earned on Margin Balance + Normally Not Paid 30% 1 x $26.95 x 2.0% 2 x (60/365) 3 = $0.03 SSF Income for 2 Months (Mature in 60 days) Interest Earned on Margin Balance + = $ % 1 x $27.06 x 2.0% 2 x (60/365) 3 = $0.02 Dividends Paid in Lieu $-0.09 Total SSF Income Earned $0.13 = Total Stock Finance Cost $-0.06 Paying 6 to hold short stock and normally not receiving interest from short stock proceeds versus SSF income earned of 13 results in a 19 benefit NOTE: All transaction costs not included 1 Margin % 2 Interest Earned 3 % of Year Exchange of Future for Physical If you are already in a long or short stock position and want to take advantage of the financing benefits of SSF, simply trade an EFP (Exchange of Future for Physical): Sell long stock and buy long SSF Buy short stock and sell short SSF How do I get started? Many investors are able to trade OneChicago products through their existing securities or futures accounts. All investors are required to review risk disclosure materials and meet suitability requirements established by their brokers. You should carefully review all disclosure statements and ensure you understand the risks of trading single stock futures before investing. For additional information, ask your broker about single stock futures trading or visit for a list of brokers who offer OneChicago products.

10 Corporate Headquarters 141 West Jackson Boulevard Suite 2240 Chicago, Illinois For more information visit OneChicago, L.L.C. All rights reserved The information in this publication has been compiled by OneChicago, LLC for general information purposes only. Although every attempt has been made to ensure the accuracy of the information, OneChicago assumes no responsibility for any errors or omissions. Examples in this brochure are hypothetical situations used for explanatory purposes only and should not be considered investment advice. All matters pertaining to rules and specifications herein are made subject to and are superseded by the official OneChicago rules. "Dow Jones is a service marks of Dow Jones & Company, Inc. and have been licensed for use for certain purposes by OneChicago, LLC. Dow Jones SM, The DowSM, Dow Jones Industrial Average SM, Dow Jones Industrials SM, DJIA SM and DIAMONDS ; are trademarks of Dow Jones & Company, Inc. ( Dow Jones ) and have been licensed for use for certain purposes by OneChicago, LLC. OneChicago s DIAMONDS futures are not sponsored, endorsed, sold or promoted by Dow Jones, and Dow Jones makes no representation regarding the advisability of investing in such products. OneChicago The Exchange for Single Stock FuturesSM is a service mark of OneChicago, LLC. GLOBEX and Chicago Mercantile Exchange are registered trademarks of Chicago Mercantile Exchange, Inc. CBOE and Chicago Board Options Exchange are registered trademarks of Chicago Board Options Exchange, Incorporated. CBOEdirect is a trademark of Chicago Board Options Exchange, Incorporated. CBOT is a registered trademark of the Board of Trade and the City of Chicago, Inc. Other names, logos, designs, titles, words or phrases may constitute trademarks, service marks or trade names of OneChicago or other entities and which may be registered in certain jurisdictions.