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: 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 – 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.

Basics: OK, so you’re bearish. What to do besides selling your house?

It seems that a growing numbers of commentators are becoming ever-louder in their bearish views. Yet few give their readers any practical advice as to how to put this “knowledge” to work. Are they suggesting that people sell their houses and rent? I’m not suggesting that the pundits are wrong (or right) but I would observe that the absence of any action plan undermines the value of such advice. (Being told it’s going to rain for 40 days and 40 nights is an outlook. Being told to build an ark is an action plan that proved to be worth quite a bit more.)

To those not familiar with the Case Shiller (home price index) futures that are traded on the CME, let me share that there may be a more family-friendly alternative to implied “sell and rent” suggestions. The CME futures allows a homeowner (or bear/bull of any kind) to financially back up their view of forward home price levels (or at least of home price index levels) with a trade.

The CME has contracts on 11 S&P Case Shiller home price indices (ten regions and the CUS 10-city index). There are 11 expirations on each contract that range (today) from May 2014 out to Nov 2018. Since each contract settles on the Case Shiller index value released in the expiration month, it can be argued that the futures prices capture the views of forward Case Shiller index values.

A benefit of trading on an exchange is that one can publicly see both the best bid and the best offer, so you don’t have to find the most bullish or bearish person. The CME is your counterparty to any trade, and since positions are fungible, one can reverse a trade at a later date in the market.

Each contract has a notional value of $250* the index level/100 so, for example, an index level of 20000 would be contract priced at 200 and would be “worth” $50,000. Each one point move in the contract value is worth $250.

The graph to the right shows recent values of the CUS 10-city index contract (mid-market in green) vs. prior levels (Dec ’11- red dashes, Dec ’12 black dashes) and vs. the historical Case Shiller index (solid black).

Forward prices are upward sloping (albeit with seasonal dips)-consistent with ~6% HPA for 2014 slowing to 3-4% in subsequent years.

Because forward prices are higher than spot levels, a trader selling at the higher futures price doesn’t need the index level to fall to profit. Instead a trader selling CUSX16 at 209.0 (so ~16% above 180.08 spot level) profits (at expiration) if the final index value is less than 209.0 (but loses money if the index settles above their 209.0 trade price.)

While one has to post margin on either a buy or sale, the CME required margin is <5% of the notional value of a contract. (That said, your individual futures broker may require higher margin).

The futures prices trade and settle on index levels so a hedger needs to appreciate that the price performance of any one house may vary from an index. Given that basis risk, I would still submit that for those looking to back up statements about declines (or rises) in the general level of future home prices, or for those with views that are different that suggested by CME futures prices, there is no better pure play on home prices available to retail traders than the CME Case Shiller home price futures.

While there has been some legitimate push-back on the volume of CME contracts traded, I would be willing to buy or sell 5 contracts (so ~$250,000 notional) to the first traders looking to hedge. Ideally this conversation might start greater two-way flow and larger-sized hedges will occur.

Please feel free to review my website www.homepricefutures.com to review blogs on trading and for links to key sites (including CME margin). I’d be happy to walk any reader through the trading process, and in particular, to talk to any futures brokers who need to get up to speed on the product. Feel free to contact me at johnhdolan@homepricefutures.com with any questions.

Basics: Historical Volume, Open Interest 2006-2013

In working to update the marketing book, I compiled historical open interest and volume data from the CME covering the period 2006-2013 into two tables in the Reports section (or that one can access here volume, open interest) and shown here.

The volume table shows that 10 times more volume occurred when the contracts were first launched in 2006. In terms of any good news/bad news/ takeaway from the volume figures, the numbers show that there was a time when there was a lot more trading, that we are doing a small fraction of that amount today, but that, given the history, it’s not unrealistic to hope that such volume numbers might be achieved again at some point down the road.

Open interest ran down fairly quickly after 2007. One possible reason was that the CME originally only rolled out contracts with expirations of a maximum of one year. Today’s longer contracts allow for more “stickiness” to open interest. Unfortunately, most trading (and open interest) has been in shorter dated contracts so replenishing expiring OI has been an ongoing issue.

I continue to receive inquiries about contracts, and traffic on this site has picked up. While all real estate indices have their quirks, I believe that this is the best “pure play” platform for expressing a broad view on 2-4 year forward real estate index values. I remain hopeful that we are one trade away from two parties being introduced for a 100-lot (or bigger) brokered trade. I’m happy to facilitate orders to that end. I’ve heard from both hedgers and foreign bulls but, to date, have not quite been able to match them up. I would suggest that any large potential buyers/sellers focus on the CUS, LAX and NYM contracts as that is where the most consistent interest has been.

Please feel free to share any potential interest with me at johnhdolan@homepricefutures.com and I will endeavor to bring the two parties to common price.

Updated marketing book for CME S&P Case Shiller futures

I have taken some of the graphs from month-end recaps and used them to update my marketing book for the CME S&P Case Shiller home price index futures. The presentation is in the Reports section or can be accessed here.

Key new features of the report (vs. prior versions):

More tables on Calendar spreads
Candle bars showing bi/ask spreads of all 121 contracts in “% vs. spot” format
Example of E-Quotes feature: graphing historical contract
Graph retracing CUS contracts back to near index highs (in 2006)

In addition to these features information is also posted on

Volume
Open Interest
Price changes Oct vs Sept
Bid/Ask Spreads
Graphs on 11 contracts

Hopefully there’s enough material here to answer many data-related questions about activity in these contracts.

Please feel free to provide feedback including suggestions for other information that you’d like to see as this version gets updated in the future.

Basics: What If CUS Index composition weights change?

The weighting for Case Shiller composite indices (e.g. CUS 10-city, referenced in the CME contracts) may be adjusted 2- 3 years after the 2010 census, per the Case Shiller index methodology. I raise this notion to: 1) increase awareness, 2) minimize concern, and 3) invite those who better understand index calculations to weigh in. I have no idea if, or when, this might happen, but as it might have an impact on CUS values, I wanted to start a (more public) discussion.

As a test, I used the changes in population for loosely defined geographic regions to try and estimate what the new weights might look like and how those changes might impact CUS values. I made the simplistic leap of faith that population growth is correlated to housing stock, which I believe, will be the denominator for assigning weights by region. The analysis is not intended to be precise but to illustrate some key moving parts in how a change in weighting might impact (if at all) the CUS index.

The population gains are primarily in the West (DEN, LAV, LAX, SDG and SFR) and South (MIA) while the losses are in the North (BOS, CHI, NYM). The WDC region bucks the Northeast trend. Given my “What If” weights, the CUS index would be impacted in this analysis by -0.18.

The reason that an adjustment (using my “What If” weights) is so small is that weighting is taken away from NYM (which trades at a fairly close level to the CUS index) and redistributed to both the low priced index areas of LAV and DEN (which would pull down the CUS value) AND the high-priced areas of SDG and WDC.

(Note that any change in the allocation to SFR should have a small impact on spot CUS values as both indices have about the same value. However this (a change in redistribution to SFR) would not be neutral to longer-dated contracts where SFR contracts trades at a premium to CUS.)

Key to any estimation/conclusion is how future index weightings might vary from this simplistic analysis. Changes from/to the low index areas (DEN, LAV) to the high-priced index areas (LAX, WDC) might result in more pronounced changes to CUS.

Feel free to contact me (johnhdolan@homepricefutures.com) if you care to discuss this theme, or any other aspect of trading home price indices.

Trading hours for CME Case Shiller futures to change after Labor Day

The CME announced yesterday (Aug 27th) that they will be changing the trading hours for the Case Shiller futures starting Tuesday Sept 3rd. Contracts will be open to trade from 8:15 AM -3 PM (Chicago hours, or 9:15 AM to 4 PM for those of us in the New York area). (See CME announcement here )

I have advocated for, and am very pleased with, the new schedule as it addresses one of the key problems associated with less liquid contracts -that of fragmented interest. Now, instead of interested parties checking for activity during a 21 hour period, trading will be confined to < 7 hours. Traders are more likely to run into each other when they have fewer chances to do so. I expect this change to be a great example of when “less is more”.

I see several additional benefits.

Traders are more likely to focus on the 9:15 AM (NYC) open than the current 6 PM open (from the night before).
Traders can use the odd opening hour to react to early-morning housing related news (e.g. new home sales, starts, index releases). Traders might want to get into the routine of checking in on CME Case Shiller trading from 9:15-9:30 to express reactions to such economic data.
Traders will no longer have to pull orders, or widen bid/ask spreads, on the mornings that Case Shiller indices are released. (Currently many bids and offers are pulled, or modified, only to be reentered at/near the original levels. Moving the CME “open” to 9:15 will allow traders to maintain those orders through the CS release with the knowledge that they will have 15 minutes to modify quotes after the indices have been released. This should dramatically reduce the experience of bid/ask spreads widening from 3 points to 10 points (or disappearing all together) on the morning CS #’s are announced.)
Market makers, and those posting GTC orders will not have the risk of a major event occurring overnight (e.g. earthquake).
There will be less need for any traders or market-making firm to “move the book”.
Daytime trading should reduce the wide price swings that have occurred in some overnight markets in the past (e.g. LAV last year).
The new trading hours will still allow European and Asian traders access to prices during a portion of their trading days.
The move to a 4PM close (3 PM Chicago) should facilitate any efforts to link futures trading to the stock market (e.g. for a potential ETF collateralized by home price futures).

I applaud the CME on this effort to modify trading hours in an attempt to encourage liquidity. I would encourage interested parties to demonstrate their appreciation of this move by the CME by making a New (school) Year’s resolution to give the Case Shiller futures another look. Market sentiment seems to be shifting from universal bullishness to concerns about the strength of the investor-fueled rally in home prices in some areas. Much has been written about possible impacts of rising interest rates. Investors have noted increased (longer-term) volatility in home prices. It sounds as if discussions related to home price hedging should be on the rise. This move by the CME is a good start to facilitating those discussions.

I will offer some trading themes for consideration (e.g. outright markets, calendar trades, implied HPA, intercity spreads) in future blogs. If anyone wants to have a theme highlighted, please feel free to contact me at johnhdolan@homepricefutures.com