Noel
Campbell

In this week’s article we will spend some time covering the topic of Individual Share Futures (ISFs). There have been many requests from readers to explain the basics of ISFs - how they work and how would you trade using them. To cover them completely is beyond the scope of just one article, so over the coming weeks more time will be spent discussing how ISFs can play a part in your trading.

Before going too far let’s do a brief recap of futures markets. Futures contracts are agreements to buy or sell a specific commodity or asset at a price agreed today, at some point in the future. Let’s be clear for those new to futures, we are rarely (if ever) planning on actually owning or delivering what we buy and sell as traders. Think of ‘buy’ and ‘sell’ more in terms of opening a position in the market, than actually physically buying or selling like you would a house. If I open a position by buying, I can close that out by selling and vice versa at any time before the expiry (or delivery) date of the contract. When you open a position, the broker will take a ‘margin’ amount from your account to be held with the futures exchange clearing house. This margin represents a ‘buffer’ or deposit amount to cover the risk involved with opening a position. Once a position is ‘closed out’ your margin and profits are placed back in your account as cash.

The value of that futures contract will fluctuate along with price movements in the underlying asset or commodity. So in the case of ISFs, as the physical (or underlying) share price moves up and down, so does the value of the futures contracts traded for that stock. To give a simple example, assume I ‘enter’ a short trade on ANZ by ‘selling’ ANZ ISFs, agreeing on the sell price at that time, then subsequently the share price falls. I can close out my ‘sold’ open position by buying contracts at the current market price (lower than when I entered) pocketing the difference between the entry and exit prices.

Leverage - ISFs give you the leverage (or control) over 1,000 shares per contract. This makes a one-cent movement in the share price worth $10 on the futures contract. 1000 x $0.01 = $10. As an example, the value of one ISF on ANZ would be approximately $30,000, however you only need to provide $1,800 in margin to open a position.

What does this mean for you as a trader? Lets say you have $10,000 in your trading account. You may be following a stock like ANZ, which presents a trade that requires a risk of $0.60 per share. If the physical stock was trading at $18.00, to buy 1,000 shares would mean an outlay of $18,000, which is greater than the size of your account. This is the case even though your total risk (at $0.60 per share) is only $600 or within your percentage capital rules. However, using ISFs on ANZ, with a margin of only $900, you can take the position easily, only utilising $900 to cover margin with a plan to exit the trade should the market move $0.60 (or $600) against your position.

The challenge for traders starting off with a smaller account size has been that some higher priced, more volatile stocks have been out of reach due to the inability to buy enough of the them to get the leverage required to make it worthwhile. ISFs have changed that. ISFs aren’t new to Australia, they have been around since 1994, but volume (or lack of) and liquidity have always been their nemesis. The SFE (Sydney Futures Exchange) has introduced ‘market makers’ to the ISF market in recent times and these now provide the liquidity required to make them worth considering. Although the volumes are still extremely light – the market makers do ensure a buyer and seller are always available. We will look further at dealing with the market makers in future articles.

The list of ISFs has grown over the past few months and by visiting the SFE website (www.SFE.com.au) you can get a list of the stocks that have ISFs available.

A suggestion for those who own the Starter Pack Software, you can add these to your new Quote Page and from there you can track them on either a daily or weekly basis. Rest assured, there will be more on ISFs to come.

Until next time, all the best,