Basics – HomePriceFutures.com

Basics -How to start trading CME Case Shiller futures and and options (for retail accounts)

After multiple inquiries, I thought that I’d pull together my responses of FAQs related to “how do I trade CME housing futures” into one blog (that I will update over time). If anyone has ideas that would improve this list, please feel free to contact me (johnhdolan@homepricefutures.com).

Understanding Reference Obligations:

To trade any future it’s important to know how the reference obligations (in this case the Case Shiller indices) are calculated. There is a write-up of how the Case Shiller indices are calculated in Reports section, or you can access here.
There are many different home price indices that perform differently due to either geographic coverage (broader vs. more narrowly defined), inclusion in index (e.g. repeat-sales vs new sales, those with FHFA conforming mortgages vs all homes), seasonally adjusted (or not), and/or calculation method (e.g. repeat-sales vs. hedonic). Note that the CME contracts reference the Case Shiller NSA (non-seasonally adjusted) indices which are based on a repeat-sales methodology with geographically wide coverage areas.
Trades referencing other indices can be done but in OTC (over-the-counter) contracts.

Format of Futures Contract: There is “An Introduction to Case Shiller Futures” in the Reports section( or you can access here) that should help explain the structure of the contracts. Some key highlights include:

There are 11 regions (one for the Case Shiller 10-city index, and one for each of the ten components),
Each region has 11 expirations.
Each point is worth $250 so the notional value of a contract priced at 200 is $50,000.
Contracts expire on quarterly cycles of G (Feb), K (May), Q (Aug), and X (Nov) months.
Contracts settle on the index value released in the settlement month (the last Tuesday).

Margins/Fees:

The CME establishes minimum margins (both upfront and maintenance) that your broker might make larger. That said, my sense is that margins have been running <5% of the notional value of a contract.
Each brokerage firm has their own fees for trades and other services (e.g. wiring funds).
Best to allow some time before first trade to open account.

Account Opening:

You need an account at a futures broker that allows their clients to trade the Case Shiller home price index contracts.
Their role will be to screen for suitability, and KYC issues. (I’m not aware of any licenses required by users to trade).
Any trade you execute will have the CME as counterparty (so I’m not your counterparty on CME trades).
I’m aware of two firms – Interactive Brokers and Insignia Futures -that allow trading in outright CS futures for individuals. IB is a good platform for those comfortable placing orders electronically. Insignia (contact Joe Fallico) is better if you need human involvement (but they also have an electronic platform).
Insignia allows trading in a broader range of orders to include: inter-city and calendar spreads, as well as options.
Please let me know of any other firms that will allow retail to trade these contracts and I will alert CME and post to my website.

Futures contracts:

I try to make sure that there is at least 1×1 (one lot bid vs. one lot offered) across all contracts out to about the 7th expiration (today X20) via quotes from me or others.
At present, many will be mine, but anyone can post a bid or offer. My sense is that the 1×1 market helps in “bracketing” bid/ask discussions, as well as creating graphs. On some contracts (typically the 10-city index, CHI, LAX, and SFR contracts) there have historically been quotes in longer-dated contracts.

Trading: Here’s a few ideas on how to approach placing futures orders:

Since many markets today are quoted 1×1 I strongly advise not to place market orders for more than than the amount bid. This is currently a thinly traded market with often limited depth to the bids or offers.
Please feel free to contact me if you’d like to discuss trading more than one lot. I may have interest at (or inside) posted levels for up to 10 lots. Several of the 5-20 lot futures/option trades that took place over the last few years (particularly in options) started this way.
Note that my interest is as a trader. I am not offering guidance or financial advice. While the CME is the counterparty, I may be the person taking the opposite position of yours.
I’m happy to network/market/blog/tweet any trading axes for larger orders. (Thin hub-and-spoke information model). Feel free to sign up for blogs on my website (www.homepricefutures.com), tweets (@HomePriceFuture), or send me emails (johnhdolan@homepricefutures.com). In the past, smaller trades (e.g. 5 lots) were useful for prompting discussion, and narrowing bid/ask spreads -key to bringing in traders who might be willing to trade larger sizes.
My sense is that a disproportionate share of trading seems to take place in the first and last hour of trading days, particularly on days when information that might have more of a direct impact on home prices is released (most notably the two days before and after Case Shiller #s are released.)
The minimum quote increment for futures is 0.2 (=$50), and for options is 0.1 ($25).
Some vendors describe the 10-city contract using the symbol HCI. Some use CUS.
Calendar spreads may be quoted differently (i.e. with signs reversed) on different platforms.

Options:

Options (both puts and calls) can be traded on any region, for any 5-point strike, for any of the 11 expirations.
Given the 1000+ option permutations, I tend to only post live quotes on 10-20 contracts. Those posts are concentrated in areas where I’ve seen the most interest, namely 9-18 month term puts where the strike is about equal to the spot index.
The Case Shiller options are options on the futures contracts -not options on the index.
Options are exercisable European-style (i.e. at settlement).
I’m open to proposals on many types of option strategy trades.
While there was a lot of option trading when the contracts were introduced in 2006, volume has collapsed. That said, I believe that options may be a very useful fit for retail clients as total exposure (for buyers) is known upfront.

I hope that this is enough to answer many “how to get started” inquiries. As noted above, please feel free to contact me if you have ideas: a) on how to improve this post, or b) any trading ideas.

Thanks,

John

Basics: Scorecard for Sept 12/ how much does (should) stock market impact home prices?

The combination of three events (the end of summer, my decision to switch benchmark to Nov ’18 expirations, and the recent sell-off in the stock market) prompted me to re-think how to show summary information to anyone potentially interested in the CME Case Shiller home price index futures. This is the result of that effort (that I will try to publish going forward).

The table below shows recent quotes (not live) for the 11 Nov ’18 contracts. I’ve added the spot level (in green), a column that shows the bid/ask spread (in yellow), the percent difference between the mid-market level (i.e. the average of bid and ask) and the spot index (in orange). The columns to the right show both the dollar and percentage changes in bids and asks since some prior date (in this case Aug 31).

Some observations, and caveats:

Most bid/ask quotes are 1×1 (i.e. one lot bid vs. one lot offered), so be cautious about inferring depth of market. (As such, the only advice I offer potential traders is to use limit, not market orders).
Most bid/ask quotes are mine (either outright or on calendar spreads from other expirations). More input would be helpful for both depth and a variety of opinions, and might narrow bid/ask spreads.
Typically (and here) the HCI contract (e.g. the CUS 10-city index) has the tightest bid/ask spread. Most of the inquiries I get are focused on HCI, CHI, LAX, NYM and SFR contracts, so those are the contracts where I’ve tried to keep spreads relatively tight. Tighter spreads have typically resulted in more trades. A additional benefit of tight spreads on this contract is that prices feed inter-city spreads to other contracts. (As such, tighter HCI X18 quotes may translate into tighter bid/ask spreads on other contracts. In addition, since some of these quotes are generated by calendar spreads, either tighter Nov ’17 bid/ask spreads, or tighter Nov ’17/Nov ’18 calendar spreads, might lead to tighter Nov ’18 spreads).
The change in bid/ask spreads (either $ or %) only have relevance if you believe that the starting quotes were “accurate”. For example, I see the MIAX18 is unchanged. That could be explained by conservative bid on Aug 31.) In addition, I would expect smaller impacts to shorter expirations, and bigger impacts to longer-dated expirations. (The analogy of playing “crack the whip” on ice skates comes to mind).
The “mid/spot-1” column may be of interest in which contracts have the highest implies HPA (and the usual suspects of DEN, MIA and SFR show well) but remember to take into account seasonal factors between spot index (in this case the August release of the June index) with the Nov ’18 contract (which references the Sept ’18 index). I would note that all contracts are priced consistent with higher index levels 2+ years from now. (Any outright bears out there?)
I’ve teed up this table to prompt discussion on how much home price index futures “should” move with changes in the stock market (and housing/building stocks specifically) as well as with changes in interest rates. Any thoughts?

Net, there is lots of information here and lots of potential ways to express an opinion on where home prices are headed. (Don’t forget options!) Feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions or trading ideas.

Basics: Approaching Aug expiration -review of theory

With the August 2016 contract expiring next week (trading stops 3 PM New York on Monday, valuation as of Tues Case Shiller #’s 9:15) it may be useful to recap the (quarterly) expiration process.

The table below has the Case Shiller index history for 3 months (June, July, and August release) for 2015 as well as the last two months (June and July) for 2016. Quotes (bids, offers and mids) for the Aug 2016 contract prices are shown in the blue area. (Note that bid/ask spreads average just under 1.0 point across the 11 contracts, which is typical of this phase of the expiration cycle.) Finally, mid-market quotes are compared to last month’s release and the Aug 2015 release for MOM (month-on-month) and YOY (year-on-year) percentage changes.

I use mid-market levels to illustrate percentage gains as, in theory, if traders “know” (or believe in their research) what the CS #’s will be on Tuesday morning, they can bid below that level, or offer above that level. As such, since each point that one can buy below the index or sell above is worth $250/point, it has been argued that the bid/ask range should be consistent with some range around the expected Case Shiller release (as traders attempt to capture differences between what they “expect” each index will be, and their bid or offer). If so, the market quotes might be useful for those drafting next week’s press releases as it appears that market quotes are consistent with DEN, MIA, SDG and SFR all posting >7.0% gains for the last 12 months, while NYM and WDC will continue to be the laggards. ( I’ll leave it to other to explain why that might make sense).

Of course this theory would work better if the markets were deeper. Most quotes are only 1×1 (one lot bid for and one lot offered) and many of the quotes are mine.

The “accuracy” of the expiring contract has wavered from months where all 11 index values were inside the bid/ask spread on the last day of trading to last quarter where there were multiple outliers (some of which were > 1 point).

I’m happy to facilitate anyone’s efforts to express a view on the next week’s index levels. Please feel free to contact me (johnhdolan@homepricefutures.com) if you like to propose a trade.

Finally, I’d note that with the expiration of the Aug ’16 contract the CME will open a Feb ’18 expiration. Since that contract expires on the value of the CS index released in February 2018 (the Dec 2017 index), I hope to propose a list of Feb ’17/Feb ’18 calendar spreads for those that want to debate HPA gains (?) for 2017.

Basics -Convergence: Feb 2016

One of key features of using CME Case Shiller housing futures to infer home price expectations, is that in the long run the settlement price of the contract, that is, at expiration, is the index value released that month. For example, the current front Feb 2016 contract will stop trading on Mon. Feb 22, and the settlement value for open trades will be the index value announced on Tues. Feb. 23. (Note that while economic indices to include the Case Shiller index can later be revised, it’s the value announced in the expiration month that is used to calculate settlement value). Thus, if a trader has a strong opinion as to what values will be announced on Tuesday (for any of the 11 contracts: ten regional and one 10-city index) she/he might bid below or offer above that level. In theory, since there may be multiple people bidding and offering, and since being “wrong” (air quotes) costs $250/point/contract, a consensus view will emerge. As such, contract prices on Monday should reflect trader’s views of the index values to be released on Tuesday.

This graph reflects the convergence of index and contract values.

Note that there can be periods (e.g. Sept -Nov 2014) when the contract price is falling while the index value is rising. This is due to two key features: 1) the contract price “in the long run” reflects views on what the index value will be at some point in the future, and doesn’t measure what’s happened in the past (as an index would), and 2) the contract is for a value at a certain point in time, while the index value exhibits seasonality. (Note 1: the NSA – non seasonally adjusted CS index values are referenced by these contracts. Note 2: forward prices can wander away from expectations for a variety of reasons, but “in the long run” the contract settles on the index value. For the CUSG16 contract the long run ends on Tuesday.)

CME Case Shiller futures settle four times per year (i.e. Feb, May, Aug, and Nov). Given this convergence of contract prices to index levels, during those four expirations we can observe what “the market” thinks (in theory, so more air quotes) index values will be on Tuesday. (There are market quotes for bids and offers, so I use the mid-market value to infer neutral “expectations”. I compare mid-market levels versus index values released in Jan 2016 to show month-on-month (MOM) percent gains, and versus the index values released in Feb 2015 to show year-on-year (YOY) percent gains. The two biggest numbers, in the last two rows, are highlighted in green. The lowest two are highlighted in red. Note that all percent changes can be impacted by revisions to earlier index values.)

If mid-market values are correct (and I’d note that there have been many times where an index value has printed below the bid, or above the offer) then here might be some headlines for Tuesday:

CUS 10-index prices showed YOY gains of 5.2%
DEN and SFR showed the greatest gains of ~10%, while CHI and WDC were the laggards at ~2%
Non-seasonally adjusted prices fell for many regions reflecting the combination of seasonal factors (most notably CHI) and the overall slower pace of gains
SFR joined BOS and DEN as 3 of the 10 regional components in the CUS 10-city index where index values are above pre-crises levels.

What I’d like to have reported is not just the historical index levels, and whether there were any surprises (e.g. index values below bids, or above offer level where someone knowing the index values in advance would have been able to profitably trade on one or the other) but whether the index values released changed forward sentiment.

To measure that, I’ll report on Tuesday the change between Monday’s prices for the X16 X17 contracts (November 2016, 2017 expirations) the prices mid-day on Tuesday. In my opinion, any surprises in the index values released on Tuesday morning (absent more 30-point swings in the S&P 500 index) is best likely to show up in prices on those contracts.

So, use the table above to check expectations and to see if there are regional surprises. Also stay tuned (or just observe market prices) for any significant changes between CME Case Shiller market levels on forward contracts between Monday and Tuesday afternoon.

As always, if you’d like to discuss this blog, how contracts expire, the theory behind convergence or any other aspect of hedging home prices, please feel free to contact me (johnhdolan@homepricefutures.com)

Basics – Taking another run at options -looking for 1 put writer

While most of my blogs have focused on the Case Shiller futures contracts, there are option contracts listed on the CME that can be traded. However, I’m not aware of any volume since 2014. Recently though, I’ve been receiving a number of inquiries from individuals looking to hedge their home against price decline. Like their car, home, or life insurance, they are looking to pay an upfront fee to insure against the negative consequences of a bad event. Whether or not they use the label, they seem to have a preference for option-like products. In addition, new forms of customized home price protection option-like products (e.g. ValueInsured ) have arrived on the market. Finally (and I think that this has been a major catalyst driving inquiries), homeowners are beginning to question how much longer the rally in home prices will play out. In effect, they are beginning to question whether they should be hedging.

To recap, the CME allows electronic posting of options (both puts and calls) on any expiration, for 10-point intervals, on four regions (CHI, LAX, NYM and the CUS 10-city index). Options on other regions can be traded “ex pit” with a minimum of 20 lots. (Please contact me for information, as I had one inquiry get close.)

A key difference between options in other markets and CME housing options, is that these are options to enter a position in the specific futures expiration, and not an option on the index. While this limits the use of options against the spot market moving, it does offer a hedge against changes in expectations of future prices. Also, since the option is on a futures contract, that contract can be employed in all kinds of option hedging strategy (to include, most importantly, expressing a view on volatility. See more below).

(However, as options on futures, this product clearly falls into the “D as in derivative” world. As such, I’ve had feedback that insurance companies regulators may look askance at members taking on such exposures. In addition, option hedging strategies (e.g. delta hedging, or plays on “vol” decay) might look like proprietary trading to a bank examiner. As such, efforts to find put writers need to be focused elsewhere.)

Until recently, I’ve tended not to maintain ongoing quotes on options due to both the number of quote permutations (2 calls vs. puts * 12 strikes * 11 expirations * 4 contracts = 1,056) plus the non-linear hedge ratios (in options vs. futures). However, after first mentioning my interest to focus on one contract – LAXX17 230 puts -I’ve since received a number of inquiries on other region/put/ expiration combinations. I’ll blog those here (and would be happy to tout your trading axes). (e.g. CUSX17 200 puts were quoted 4.0/5.8 on Friday)

It turns out that the last two years would have been a great time to write options. Volatility in the futures contracts (i.e. monthly price changes) has been very low. I highlighted in Friday’s blog that volatility has been < 10% of that of the S&P 500 index (and under 4% outright).

I further noted that while some analysts have attributed the stock market “noise” to international events (e.g. slower growth in China, impact of lower oil on Russia), that home prices seems to be primarily a domestic exposure (except for SFR, NYC inner city areas) and that homeowners benefit from lower energy costs (think heating oil and commuting) and interest rates (watch for a surge in refi index).

Net, the offsetting impacts of the above positive effects and of negative wealth effect from stock market fall, might keep home price volatility low.

The challenge of getting option trading re-started doesn’t seem to be in finding hedgers (at least at trades of <30 contracts). Hedgers are open to paying a fee, even it means opening a futures brokerage account. (That said, there are not many brokers who will let their clients trade futures as they are concerned about low volume and price exposure the other way. However with options, once a client has paid the put premium, I’d argue that they can’t lose any more money. Brokers should be more comfortable allowing put buyers.)

In my mind, finding put writers has been the dilemma. Here’s why you might consider doing so.

I think that it can be argued, that put buyers, as with the other retail insurance products cited above, may not be looking to trade at the expected value given empirical or expected volatility of an index. They are looking instead, to reduce the tail risk in their lives. and, in possibly paying a price through “fair value”, increase their personal utility. As such, I might expect (as with other retail products) a large number of small hedgers (eager to reduce risk) and a much smaller number of put writers who feel comfortable with the risk/reward profile. Since there’s likely to be an imbalance between the number of put writers and buyers, the put writers will be more likely “price givers”, and the put buyers “price takers”. Since I’ve not found many put writers (but hedge funds come to mind) I would expect early entrants to be able to set prices with limited competition.

While all put writers will have to post margin, an institutional put writer may have a lower cost of capital allowing them to maintain margin at a lower cost than an individual looking for 8-10% returns.

Since the options are on the futures, such writers should (in theory) be able to hedge their exposures with the referenced futures. As such, both they, and I, have a vested interest in seeing liquidity in the futures markets improve. I’m open to accommodating put writing activity via trades in the futures markets.

Writers need to appreciate that while the insurance products listed above can be aggregated with benefits of low correlation, regional home price declines are likely to be much more correlated. (And of course multiple trades on the same index all reference the same event). As such, required returns might need to higher, and/or level of exposure might need to be lower. In effect, this may be an interesting exposure for someone looking to a slice of a new risk to an existing business.

Finally, there is a concern that home price risk might be subject to jumps (e.g. earthquake, terrorism). I have some ideas (use of bear spreads) on how such risks might be managed.

Net, for anyone interested, I’d be happy to share thoughts on put writing. I’ve been posting the ask side quotes so far, but have to include a return on capital for potentially holding the position for over a year. Again, take a look at LAXX17 230 puts, and if interested, contact me at johnhdolan@homepricefutures.com

Basics – Hedging with Home Price Futures, FAQs

Most recently edited March 2, 2016

I’ve been receiving an increasing number of inquiries from people who, probably for the first time in a few years, (maybe given what’s going on in the stock market) want to explore hedging.

I’d encourage you to read both the Case Shiller Futures -Introduction, and the Case Shiller index methodology (both in the Reports section). In the meantime here are answers to some FAQs.

You found the right person. I am the market maker for the CME S&P Case Shiller futures program. (5+ years now). For the last few years I have posted many of the quotes, have been a party to many of the trades, and have much of the (limited) open interest. I’m eager to rejuvenate trading in housing derivatives and am willing to spend time answering your questions and getting you up to speed. Feel free to contact me at johnhdolan@homepricefutures.com
Volume and open interest (OI) on futures have been VERY low (in many contracts, zero). (See Reports page for most recent monthly recap with pages for volume and OI). I agree (in anticipation of your question) that there should be greater usage of home price derivatives. I hope to dust off a past blog/LinkedIn post/ as to some of criticisms I’ve heard over the last year. One reason that seems to have gone away, is that (as mentioned above) people feel the need to hedge (that they didn’t in the rising markets of the last few years.)
There are other “retail” programs that allow a homeowner to hedge home price risk. (Check out www.valueinsured.com for one example). I’d be happy to discuss such programs, but you, the user, will need to determine whether CME futures, options, or another program is most suitable for your needs.
You’ll need a brokerage account that allows trading in housing futures and/or options. Many firms don’t support the products as volume and open interest are very low. Interactive Brokers has a good platform for futures, but there are others. Insignia Futures allows option trades. I’m happy to provide contact info. If your broker does allow trading in housing futures, let me know as I’d be happy to support their efforts.
That brokerage firm will determine suitability and margins (the CME sets minimum margins that firms can add to).
- Margins tend to run about 5% of the notional value of a contract, but vary by region.
While you might contact me to discuss, or propose a trade (see below) know that your counterparty on any CME exchange-traded trade will be the CME. OTC contracts are another issue.
FUTURES
Futures prices settle at the value of the reference index at settlement. As such, they may not move will spot levels, but should converge to spot levels by settlement. (See Feb 20, 23 blogs)
There are futures contracts on the Case Shiller 10-city index for each of the ten regional components (BOS, CHI, DEN, LAV, LAX, MIA, NYM, SDG, SFR, and WDC)
- Some trading platforms refer to the 10-city index contract by “CUS”, others by “HCI”.
- Quotes are available on Bloomberg and YahooFinance.
There are 11 expirations for each region. Today those are (May 16, Aug 16, Nov 16, Feb 17, May 17, Aug 17, Nov 17, May 18, Nov 18, Nov 19, Nov 20)
The Case Shiller indices constitute broad geographic areas. Forward home prices may diverge to varying degrees within a region. Some local regions are correlated, but not with a factor of 1.0 (something to think about when hedging).
Beyond that please appreciate that there is also a risk (“basis risk”) between the price performance of your house and that of an index. There is no hedge to overpaying for a house.
Realize that futures prices have been quoted at higher than spot levels since about 2010. That is, the futures price already reflects some “expected” gains vs. spot indices. (Yes, the opposite was true in 2009 – i.e. forward prices were lower than spot).
For example, (with higher forward) prices, one shouldn’t buy futures because they expect the spot index to rise. Some rise has already been priced in.
Conversely, if one expects the spot index to be lower at a future expiration, one should appreciate that the futures prices are above today’s spot levels. As such, even if spot levels end up unchanged at expiration, one would have a profit if they sold contracts earlier, when at a premium.
Futures prices change -just like other markets. For example the SFRX17 contract was quoted 235.2/238.6 (bid/ask) on Dec. 31. It was quoted 231.0/236.0 in early Jan.
Re: Trade execution
Futures have notional value of $250/point. So a contract trading at 200.0 represent $50,000 of notional exposure.
A 1 point move on one contract = $250. A 0.2 move (the minimum tick) = $50.
I strongly suggest that you don’t use market orders as you might find a sale being executed at lower that posted levels. Use limit orders. I typically only post 1×1 markets (one lot bid/one lot offered), so there may not be much depth behind quote. Please feel free to contact me if you have a particular region/expiration in mind. I have been willing to post quotes for higher amounts, or inside quoted markets in the recent past. Feel free to post your own quotes
I often post quotes in 60+ of the shorter expiration contracts (out of the total possible 121 -11 regions (times) 11 expirations).
Bid/ask spreads tend to widen as time to expiration increases. As such, I have not felt compelled to quote markets in many of the expirations beyond May 2018 (except the CUS 10-city index series.)
OPTIONS
While options are possible, I’m not aware of any recent trades (a/o Feb 29, 2016). I’ve posted separate blogs on options but I’d highlight:
- There are four regions where options (both puts and calls) can be traded electronically (CUS, CHI, LAX and NYM)
- Trading in other regions is possible (if done “ex-pit” in minimum 20-lot orders)
- Options are on the futures contracts, not the spot index
- Given the permutations of regions, expirations, strikes, and puts/calls, I’ve chosen to react to inquiries rather than post multiple levels. While much of my recent focus has been on LAXX17 230 puts, I’d note that there is a 4.0/6.0 market today (Jan 21) in HCIX17 200 puts.
OTHER INDICES, OTC TRADES
From time to time I get inquires for traders looking to hedge using other indices (e.g. NYC Case Shiller condo index), or other more-narrowly defined regions, using either forwards or options. I am not aware of any such exchange-traded products so any trade would be OTC (over-the-counter). While I’m VERY open to discussing this topic, the issue of counterparty risk is one that will need to be addressed. Net, not impossible, but contact me (rather then detail here).

I’ll update this list as I get more inquiries. Again, feel free to fire away with questions. If you are uncertain about something: a) the time to ask is before a trade, and b) other’s might also have the same uncertainty. Your question will likely be added to the FAQs.

Basics – CME Site describing protocol for closing prices

As pit trading at the CME winds down, the Exchange has made a concerted effort to clarify any potential changes in procedures to calculating closing* prices. There are no changes to how housing contracts are closed, but I thought that I’d post a link both here and in the CME Resources section on the front page for anyone who wants a formal review. Net the process remains last trade, or a higher bid, or lower offer. As such, closes over the last few years of rising markets (and infrequent trades) have tended to inch higher as better bids are posted. Those who watch the contract prices closely might see sporadic bids in less-frequently traded contracts. Some of those quotes may have had the impact of raising closing prices and of keeping some sense of a “reasonable” forward curve.

I continue to focus on mid-market levels as a) a somewhat more neutral view of where the next trade might take place, and b) to notice the impact of changes to bids and offers – even if the close remains unchanged. Fortunately, with tighter bid/ask spreads, closes and mid-market levels have converged for many contracts out to Nov ’17. Bid/ask spreads are wider (if two-sided markets exist at all) in longer-dated contracts so differences between close and mid might be more pronounced.

Finally, I put an asterisk by closes in the first line as prices are determined at 2PM (Chicago) even though the contracts stay open until 3. (The contracts used to close at 2 but I asked that the close be moved to coincide with the stock market close a few years ago.) While this is only a detail, it has some importance at expiration as the front contract stops trading an hour before the others.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions, or ideas for future blogs.

Basics – New contracts upon expiration

I had a question from a reader that reminded me that the schedule for rolling out of new contracts may not be intuitive to those that don’t follow the contract every day. There are 11 expirations in the CME Case Shiller housing contracts, and when one rolls off, it is replaced with another to always keep 11 expirations open at any time.

Here’s the rules (upon each of four quarterly expirations):

Nov – New contract five years forward (e.g. Nov ’19 was introduced when Nov ’14 expired)
Feb – Aug contract 18 months forward
May- May contract 3 years forward
August -Feb contract 18 months forward

While the logic may not seem straightforward, given the current set of expirations this rule set will produce a set of 6 consecutive, quarterly contracts that expire over the next 18 months, and annual November contracts that stretch five years forward. Since the Nov contracts are both open the longest, and since they allow for the longest duration hedges, bid/ask spreads tend to be better in the Nov series. In addition, open interest tends to be concentrated in Nov expiration contracts.

So, applying the rules from above, when May ’15 expires, we’ll see a May ’18 contract; when Aug ’15 expires, we’ll see a Feb ’17 contract; and when Nov ’15 expires we’ll get a Nov ’20 contract.

Feel free to send me questions (johnhdolan@homepricefutures.com) on this blog or any other aspect of CME Case Shiller futures.

Basics – Restarting Intercity (IC) spreads

Intercity spreads (IC) are a way to express a view on the relative price moves between two regions for the same expiration. They can be handy trading tools if one has conviction on the future performance of one region versus another, but where the trader doesn’t want to take as much risk on the absolute level of future index values.

For example, the HCI/NYM X16 IC spread was quoted 10.6/13.6 earlier today. (As with calendar conventions the CME quotes the spreads by ta IC Jan 6 king the difference between the first value and the second. Be careful as some brokers may have a different convention.)

The table to the right shows that the 10.6 quote could be translated a 203.0 bid for the HCIX16 contract and a 192.4 offer on NYMX16 (or 203.6/193). At those levels the HCI bid represents a 7.9% increase over spot levels, while the NYM offer represents an 8.8% increase or a (rounded) 1.0% difference. If the trader executed and held the 10.6 position through to maturity, and both indices gained 8% by Nov 2016, then the trader would come out ahead as the HCI long index position did better than 7.9%, while the NYM short index position did worse than 8.8%.

(An important note -this example has two indices priced at about the same level so similar percentage price moves translate into somewhat close point moves, and I’ve used an illustration where the eventual price move (8%) was close to the original levels. That would clearly not be the case for two indices (e.g. CHI vs WDC) with dramatically different index levels. As such 1:1 IC trades might need to be adjusted with additional outright trades, to balance notional exposures, if a trader wants to more precisely express views on percentage index moves).

Conversely the offer of 13.6 is priced such that HCI leg (that trader is offering to sell) is priced for a higher gain than the NYM index.

I’ve found that bar graphs such as this one are useful in interpreting how the CME market is pricing future gains across the 11 contracts. Note that since NYM and LAX are such large components of the CUS-10 index that percentage gains on those contracts tend to be near the CUS-10 index.

Some contracts already have over-/under-performance (vs. HCI index) already priced in (much like outright contracts already have higher forward prices, priced in). For example, an offer willing to buy HCI and sell LAX at even percentage moves would be off the market, as the bar chart indicates that the CME futures quotes have already priced in weaker performance by the LAX index (relative to HCI). Similarly, a bet that MIA will outperform HCI will be off the market, as stronger MIA performance is already reflected in the CME outright quotes.

IC trades can be used to express views on individual indices vs. the CUS-10 index (as above), within a region of the country (e.g. BOS v. WDC, or LAX v. SDG), or for any other combination (e.g. LAV v MIA as a possible tourist, foreign investor play).

A benefit of IC orders is where one leg (e.g. HCI) trades at very tight bid/ask spreads. Then an IC order might translate into an outright level on the second leg that may be inside the prevailing outright level on that second leg. Thus tight first legs (HCI) and good two-way IC spreads can help bring in outright spreads. This is particularly useful in longer-dated contracts (especially in thinly quoted contracts) where the absolute level of forward index levels (on the second leg) is reflected in very wide bid/ask spreads.

So, I’d encourage traders to express outright (not calendar-derived) views either on longer-dated HCI contracts and/or IC spreads. Either will contribute to tighter bid/ask spreads (or better depth) in the longer dated regional markets.

While the CME publishes quotes on IC spreads I understand that not all data vendors do. Here’s a few of my quotes to give you a feel for IC spreads and for you to test translating IC spreads into implied out-/under- performance. I’ve posted outright markets in HCIX17 and hope to populate some Nov 2017 IC spreads in the next few days.

HCI_NYM X16 10.6/13.6
HCI_CHI X16 60.6/65.0
CHI_SFR X16 -13.2/-6.6

Finally, if you have an interest in trading, I appreciate that even those (limited number of) futures brokers that offer a platform for housing futures, post IC trading spreads. One (new to me) broker that seems to have exactly what an IC spread trader might be looking for is Insignia (www. insigniafutures.com)

Feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions, or if you’d like to discuss any particular IC spread. Restarting IC spread trading is a goal for me in 2015 so I’d love to get something started.

Basics – Understanding CUS10 values using new weights

I just got the answers that I was looking for in response to a reader’s question on how to tie out the CUS 10 index valuation using the recently announced new weights. The net impact of this corrected approach- this month- was a lower CUS index than a simple weighted average of the price of ten regional components. It turns out that the negative performance of the NYM index, together with an increase in the weight of the NYM index, combined to pull the CUS index value to the lower 181.43 value than a simple weighted average (of prices) using either the old or new weights.

What this new approach implies is that going forward CUS indices, and therefore “equivalency” prices on the CME CUS (10-city index) futures will depend more on % changes in the ten reference indices than a simple weighted average.

The table below shows my understanding of how the mid-market prices for five November series expirations might be used to value the CUS November expiration contracts and the correct approach going forward in the lower right corner. That methodology takes the percent changes in contract prices (using the recent CS release as a starting point) times the new CUS-10 index weights to come up with a the percent change in the CUS index. Note that it turns out -given how forward implied HPA tend to converge in today’s futures prices (not so last summer) -that all methodologies are close to each other, and the actual mid-market prices for the CUS futures (shown in the far left column).

Net, limited impact on the CME markets.

Feel free to contact me (johnhdolan@homepricefutures.com) if you care to discuss this blog or any other aspect of housing derivatives.