A good way to learn how CME Home Price futures contracts work is to watch as the front contracts reach expiration. Recall that the contracts have settlements in the current year at 3-month intervals (Feb, May, Aug, Nov) and that the contracts “Cash-Settle” – that is the value used to settle an open position is the index number published on the last Tuesday of that month.
The May 2010 contract is approaching expiration as the S&P Case-Shiller index results for March 2010 will be released on May 25th. Since any open interest will be cash settled (absent a closing trade) on the numbers released on May 25th, bids and offers tend to converge toward the expected index numbers. That tendancy has the effect of narrowing the bid/ask spread. As of today, May 13th, the bid/asked spreads in the May ’10 contracts range from 1.20 to 4.60 points (or 120 to 460 as quoted by the CME). Recall that the CME contracts trade in 20 cent intervals and that 100 points (or 1.00 on the CS index) is worth $250.
The New York contract has the distinction of being the only contract where the current offer is lower than the prior month’s index. (There are no higer bids than last month’s CS index).
Any long/short position that needs to be rolled forward could do so either by legging the two sides of a trade (e.g. buy/lift/cover May ’10 short while trying to set a new short position in a more distant contract). Given the illiquidity, a better approach (if one has to roll) is to enter orders in the calendar spread markets. That is, one could place an order to execute a Buy May ’10/ Sell Aug ’10 at a certain price spread, but only if both orders were executed at the same time. Again, while the calendar spread execution is better than legging each side of the trade, the bid/asked spreads have tended to be wide. (I’m working on that next and will respond to inquiries.)
Finally, while contract expiration may be interesting, and there may be opportunities for trading (and thereby providing liquidity) at the end of the day most core real estate investors and hedgers are looking much into more distant contracts 18-36 months out to express their views.