I’ve started to receive more than a trickle of inquiries on options. Recall that the CME reestablished a platform for electronically trading options in the CUS, CHI, LAX and NYM contracts last spring. There have been no trades but the pieces are in place.
While options can be traded on any expiration, and for any strike (in five -point increments) I’m going to focus on longer-dated expirations here.
I’ve posted a few day-orders in the CUS markets (for the Nov 2017 expiration) to get people comfortable with a range of possible levels (and to steer them to CME quote pages). Click here and/or use the links on this website’s homepage to view option markets.
- CUSX17 160 puts 2.0/7.5
- CUSX17 170 puts 3.0/ 10.0
- CUSX17 190 puts 10.0/20.0
Inquiries have fallen into three categories. On the one hand traders are trying to figure out how to approach the issue of implied volatility for longer-dated futures. I would think that a set of strangle markets (e.g. simultaneous buy/sell of put and call at the same strike) would help. I posted a 10.0/20.0 market in the CUSX17 190 puts. If the calls traded at the same level (slightly lower as the mid-market is above 190), then a strangle market of 24.0/36.0 might be a range to start a discussion.
A second form of inquiry is from people looking to buy protection against today’s spot index levels. Given the steepness of forward curves, and given recent low levels of volatility I would think that some Black Scholes models will produce some fairly low values that might be appealing to protection buyers on what I would consider very out-of-the money strikes. That said, I’m not sure that BS models are correct for options on home prices (given high auto-correlation) and the issue of the appropriate level of capital adequacy for endless tail risk still hasn’t been resolved since the Financial Crises. In addition, the CME (and your broker) will charge margins that a put writer will need to take into account that might change the results from a model. As such, I would expect that straddles (buying one strike while selling another) will be important if options are to flourish.
As with outright CME quotes, the notion of legging a straddle trade (to lift the offer in one market while selling on the bid side in a second) is unlikely to be as profitable as an arranged straddle trade. For example, someone might offer to buy/write protection from 170 to 160 on the CUSX17 contract for 1 to 3 points, levels that can only be orchestrated in a negotiated straddle.
Finally, there have been some quotes on options on contracts as they approach expiration. Several of these are for situations where the premium is so low (for a long) as to require less proceeds (when margin is included) than an outright position (even if for close to the money strikes).
I’m open to stimulating discussion on any of these three option strategies, for any expiration and for any regional contract. (Recall that contracts other than the four listed above -CUS, CHI, LAX and NYM- would have to be pit-traded, which would be slightly more difficult.)
I think that options coverage, rather than outright longs and shorts, is probably a strategy that retail hedgers might have interest. Please feel free to contact me (johnhdolan@homepricefutures.com) if you’d care to discuss any aspect of housing options.