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http://www.ProfitableTradingTips.com - Trading US Stock Futures - The US stock markets fell the other day, as did options and futures on many US stocks.
Determining how to approach markets today does not just have to do with trading US versus foreign stocks but with what vehicles to use in trading.
What is the best approach to the market these days?
Is it trading stocks or stock options or is it trading US stock futures?
What is the point of trading US stock futures contracts when one can just as easily buy or sell stocks or stock options?
Single stock futures contracts can be traded on the OneChicago futures exchange and on exchanges from Great Britain to Spain, India, and South Africa.
In a standard stock futures contract one party agrees to purchase and another agrees to sell stocks on a given future date.
The price of the contract, known as the strike price or futures price, is set and does not change no matter what happens to the stock price.
Although no money changes hands between the parties when the contract is entered into US stock futures are traded on margin.
Thus a trader needs to maintain a margin account when trading US stock futures.
Traders engage in the same fundamental and technical analysis in trading futures as they do in trading stocks directly or in trading stock options.
Trading US stock futures offers the trader leverage, because he trades on margin.
Obviously, this can enhance profits or magnify losses.
An attractive feature of stock futures is the ability to simultaneously sell stocks that one owns and engage in a futures contract to buy the stocks back at a later date.
This, in many instances, amounts to a low interest rate, short term loan and is the primary reason that some traders trade US stock futures.
This is known as an Exchange Future for Physical (EFP) transaction.
According to OneChicago,
“An EFP is the simultaneous selling of a stock and buying of a Single Stock Future (SSF) for a long equity position or buying of a stock and selling of a SSF for a short equity position.
SSF have an interest rate built into their price that is determined by a true competitive marketplace. Like repos and reverse repos in the debt markets, EFPs provide a cheap and efficient financing vehicle.”
Just as in successful stock trading, success in trading US stock futures depends upon a thorough knowledge of the basics of the stock in question and of current market sentiment.
In times of extremely volatile stock trading, such as happened in the last year, those who enter long, or “buy” positions expect to see a stock rally and those who enter a “short” or sell position expect to see a stock fall in price.
Those who choose to use an EFP (Exchange Future for Physical) in order to obtain short term financing are well advised to thoroughly understand their stock positions before entering into a futures contract.