I want, all the [intelligent] risk-averse, retail investors I know, to take a look at the new (to me) “vehicle”, if you can call it that, available through Interactive Brokers. They are calling them EFPs.
EFP – Exchange For Physical.
They are bundelling single-stock futures, with equities, into one trading instrument – and making these instruments screenable. I’ve never traded single-stock futures, or even known anybody who has. I don’t know, how liquid they are, but as far as I’m aware, they work like every other form of futures contract. For those who don’t know what a Futures contract is, let me explain. When you go to the furniture store, and put a deposit down, to buy a piece of furniture, to be delivered in the future, you’ve just initiated a futures contract between you furniture store. They are going to deliver your furniture, and you’ll pay them on delivery. This is how oil is traded. It’s how copper is traded. It’s how most things which are difficult to deliver, and even some things which are easy to deliver, is traded. So, if you owned a big stack of stock certificates, it might be easier for you, to trade a futures contract, in order to get rid of them. That’s a single stock futures contract. Now, say, you want to sell your 100 shares of GOOG, and the current bid is exactly $500. Assume you don’t need the money, for at least a month. You take a look at the single stock futures, and somebody out there is willing to buy 100 shares of GOOG, in 30 days, for $505. Maybe, they don’t have the money TODAY, but really want to buy some GOOG. You hit the bid on that contract, now you’re locked into giving them your GOOG in 30 days, in exchange for $505 per share. You’ve just made, 1%, in 30 days. Between now and then, GOOG goes up – they profit, GOOG goes down – they lose, you get your 1% for waiting. IB is bundelling, these single stock futures, and equities, into one bid and ask. So, you can buy that GOOG, and sell that Single Stock Futures, in the same trasaction – knowing exactly what yield you’ll get ahead of time.
Now, be aware, liquidity, will likely trap you in until expiry. So, be prepared to HOLD.
They are basically, allowing traders, to buy and sell liquidity and/or arbitrage the financing rates for lending equity. I think it’s a bid, for the industry, to reduce the rates paid to finance shorted equities – by allowing retail to get in on the action.
The yield you can earn, is right now, in the high single digits per year. It could even approach 12% to 15%, per year. A little low, for my tastes, but great for many people I know.
If you have any questions, leave it in the comment to this post, or contact IB. From what I can see, this definately makes far more sense than using a savings account. I can’t see a way, that your principle could be at risk – other than if you want to exit, before the expiry of the futures contract.
YES – if you’ve never traded futures, this post, will sound complicated to you. I guarantee, if you’re reading this blog, you can figure it out. I also guarantee, you’ll be impressed when you do figure it out, with how simple it actually is.
Please consult a registered financial planner, before making any investment decisions.
