CUS – Page 2 – HomePriceFutures.com

Negative bias in longer-dated expirations?

I’ve been puzzled by both the lack of trading in longer-expiration contracts and the evolving level of forward prices. The longer expiration futures allow hedges to be put in place for years -more typical of the holding period of a home – yet most trading is in the front contract. Inventory is tight, incomes are growing (at least from the Friday unemployment report), and inflation fears seem to be rising (a concern for CS contracts denominated in nominal levels). I’d also expect the next Pulsenomics survey to reflect HPA that are still >3% post 2017.

Yet the tables below illustrates (from page 21 of my Oct recap), quotes on longer-dated contracts have come down over the last month. Year-on-year percentage gains (e.g. Nov ’16-’20) have collapsed to be consistent with HPAs of <3%.

While general bearishness might be one explanation for the change, I would tee up for your consideration a different set of thoughts.

As someone who gets many inquires, I understand that there may be more hedgers than natural longs (in the short run, at this moment in the product life cycle). I appreciate the theory that suggests that hedgers might increase their utility in selling below “expected” levels. But where are the insurance providers who, faced with sellers selling below fair value (if that’s the case) are willing to step in to take the better than even odds opportunity? I realize that once someone enters a long forward long (or for that matter, writes a put option) that they have few hedging opportunities, but forward HPA of 2.5% seems to be well below expectations.

While I’ve shown the HCI contract (on the CUS 10-city index) the same themes hold true for other regions. The California markets have been the ones quoted down the most in longer expirations. I can’t say (no one can) that this is all general bearishness, but I am willing to point out that calendar spreads have contracted to low levels, and -unless people have become a lot more bearish – it only makes sense due to the thinness of markets. A few hedgers seem to have pushed down back end levels. I’m not sure that it makes sense.

This topic is one that deserves commentary and/or some trading reactions. Where are either the natural longs, or those willing to step up to enter trades at below consensus values? Please feel free to contact me (johnhdolan@homepricefutures.com) if you’d like to engage in either.

Oct month-end (top) vs. Sept month-end (bottom) quotes.

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 _Bid Ask spreads for Case Shiller futures contracts

My last blog talked about which contract expirations get most of the (limited) trading. This one shows (see table below) where the tightest bid/ask spreads are (today). That’s important as the markets with the narrowest bid/ask spreads tend to be the ones with the greatest likelihood of a trade. After all, if a buyer and seller are 4 points apart the difference may be too much to surmount, or there may not be market events that would cause a buyer or seller to change their price so much very quickly. However, a market with a bid/ask spread of 0.20 points (the minimum price move) might result in trade should either side (assuming that the bidder is not the person offering) should either party changes their mind even slightly.

The table also shows that there are two-sided markets in all contracts out to Nov 2017, but after that only in a few contracts (ones that I think other traders might have an interest). (Note that a new Aug 2017 contract will appear when the Feb 2016 contract expires.)

The two tightest bid/ask spreads (by expiration) are highlighted in green, while the two widest are highlighted in red. I try to keep the CUS (10-city index) as always one of the tightest bid/ask contracts as CUS contracts are of national interest and they can be used as one side of Intercity (IC spreads). Bid/ask spreads are shown in points, so lower-priced contracts (e.g. CHI) might show up as one of the tightest contracts, but not necessarily on a percentage basis. Conversely, any higher priced contracts that show up on the tightest list, will be even more relatively tight on a percentage basis.

Bid/ask spreads tend to widen the longer the time to expiration, but not uniformly. As I’ve noted in other blogs the November expiration contracts are outstanding the longest, are the only contracts for hedging 3+ years, and thus tend to have the most open interest and tightest markets.

Some contracts might have wider bid/ask due to volatility (e.g. SFR) but some are wider just because they don’t seem to get much interest (e.g. DEN, and LAV).

I’d appreciate any help in narrowing any of these spreads with bids and/or offers or feel free to “adopt” one contract (or region) and make the markets yours.

Feel to contact me (johnhdolan@homepricefutures.com) if you like to chat about this table.

Basics -Distribution of Trades (by Expiration)

In preparing to write an upcoming blog on “trading in expiring contracts” I first wanted to check to see whether my intuition that trading volume was concentrated in the front contract, was borne out by the numbers. While there is probably a more comprehensive database at the CME of all trades, I decided to first check with my own trades. Since I’ve been market maker for 5+ years and have been involved in the majority of trades, it seemed likely that my trades might resemble the universe, but I’ll concede that I may have trading biases (e.g. stick to/avoid/ front contract that may skew the results slightly).

I took my database of 800+ trades (by lot count) and tried to eliminate any trades involving one leg of a calendar spread where there was a buy and sell at the same price, on the same day. (That is the calendar spread combined with an outright trade may have facilitated an outright trade, but the simultaneous buy and sell of the same contract on the same day at the same price did not by itself indicate interest in trading a contract with that expiration. My intent was to only capture the outright trade).

The following table shows the distribution of 600+ trades grouped into months to expiration buckets.

While more than 60% of the trades (line -right axis) were on contracts within 12 months of expiration, trades within one month of expiration were <10% (blue bar-left axis). However, there does appear to be some front-loading to the trading in that ~40% of my trades were on contracts with <4 months to go (so typically the front contract) and ~85% of my trades were on contracts that expired within two years. Tighter bid/ask spreads in shorter expiration contracts (due to less uncertainty?) may have facilitated greater trading in shorter expirations.

To build volume in longer-dated (>2 years) contracts it seems that more effort needs to be focused on calendar spreads and inter-city spreads. I’ve tried to encourage such trading with X16/X16 calendar spreads and Intercity spreads across the X17 contracts, but those are all within two years of expiration.

That said, I’m heartened to see some outright interest in the HCIX18 contract. I’d encourage others (and will help) to use recent tightness in the HCIX18 bid/ask spread to contribute X16/X18 and X17/X18 calendar spread quotes, as well as X18 IC spread orders.

If you have any questions, please feel free to contact me (johnhdolan@homepricefutures.com) to discuss any such ideas.

Option Quotes

Here’s my long overdue template for option quotes. I wanted to get this done for the month-end report AND to inquiries I’ve had for HCI (CUS 10-city index), LAX and NYM contracts. (I figured that I’d toss in numbers for CHI to show all four regions where one can post electronic quotes).

Note that my focus (and the inquiries) has been on slightly out-of-money puts for the Nov ’17 expiration. Any other permutation of (round) strikes, expirations and puts vs. calls is possible. However, I think that the futures contracts already suffer from enough fragmentation of interest, so I’m going to focus on these four contracts for now.

The HCI and LAX quotes are 5×5, but I’ve only 1×1 on the others to get things started. I’m open to quoting prices on larger amounts.

(Again, options can be cleared at the CME but they have to be done ex-pit and for a minimum of 20 lots. Feel free to contact me for details.)

Users will need to decide what kind of option pricing model they want to use. I’ve teed up my belief to some academics that while the Case Shiller indices are both a) highly auto-correlated and b) can’t be shorted (or bought and carried) that options on the spot indices might be challenging “although some retail products do reference spot indices. By contrast, data on the closes of futures contracts makes price moves look pretty random, and you can hedge options vs. futures (e.g. delta hedging) so option models might work. (That said, I might consider different estimates for vol as go longer, or skew as you go way out of the money. All the more reason to stick to near at-the-money, relatively short expirations.)

The topic of options is both theoretically interesting (to me) and seems to be an area where there is client interest. I’d be very happy to brainstorm with someone on the topic and/or to tout any trading axes. Please contact me (johnhdolan@homepricefutures.com) if you care to talk about either.

Nov ’15: One week to go

With only one week to go before the (Tuesday, Nov 24th) release of the Case Shiller index results for September, I’ve taken a sharp pencil to tighten up bid/ask spreads in Nov ’15 (X15) contracts. Here’s a table of historical Case Shiller values and this morning’s contract quotes for the Nov ’15 CUS 10-city index and the 10 component regions. Recall that since the futures contracts settle on the CS index values announced next week, the futures should (in theory) reflect market expectations for what those 11 numbers will be.

Bid/ask spreads for the Nov ’15 contracts are all under 1.0, and average 0.67. The CUS (10-city index) contract is quoted at 0.2 difference (the minimum price move for these futures) while the SFR contract has the biggest bid/ask spread.

The dual impact of negative seasonal factors and declining HPA show up in ever smaller differences between last month’s Case Shiller indices and the Nov ’15 mid-market price levels. In fact, pricing on the CHI contract is consistent with a month-month decline in the non-seasonally adjusted index. (As an aside, year-on-year differences in futures prices still show implied HPA of 2-5% for 2015-2016, for all 11 contracts).

Annual gains (not shown) on the CUS (10-city index), as measured by comparing the mid-market value of the futures contract versus the index result for last year, are “expected” to be ~4.63% for the CUS index. Year-on-year gains should run between 1.8-1.9% on the low end (for CHI, NYM and WDC) to in excess of 10% (for DEN and SFR).

Over the last few years there have been occasions (recall that these futures expire quarterly) where the bid/ask either bracketed the actual Case Shiller index that was used to settle the contract, as well as times when the index results were outside the bid/ask spread in as many as 7 contracts. The possibility of a version of the second scenario (i.e. that futures are “wrong”) should have home price analysts comparing their model results versus futures prices looking for a money-making opportunity. At $250/point, the analysis seems worthwhile.

Recall that trading in the expiring contract stops at 3PM (NY time) on Monday. Other expirations will trade until 4.

Finally, as Nov ’15 goes into the record book, the CME will roll out a new contract for Nov ’20 expirations on Tuesday.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions related to this blog or trading of these contracts. The contracts tend to be quoted 1×1 (i.e. a bid for one contract versus an offer of 1 contract) but I might be inclined to trade larger amounts. In addition, intercity spread order are possible if you think that one region’s results will diverge from another’s very differently that current contract prices “suggest”.

Aug Recap posted

I’ve posted a recap of activity for August in the CME Case Shiller home price futures contracts. The report (and monthly price changes are in the Reports section or can be accessed here: Recap, Prices )

It was another quiet month of trading (only 5 trades) but prices moved sharply lower (possibly in sympathy with the stock market sell-off). Bid/Ask spread contracted in the 10 regional contracts (when summed across all expirations, and spreads were notably tighter in 4 expirations (see table).

Open interest declined to 49 (as the August ’15 contract rolled off). Almost half the OI is in what is now the front contract (Nov ’15). I’m open to ideas on how to move these positions forward (and open new ones) to grow OI levels.

Longer-dated calendar spreads and outright quotes were consistent with declines in longer-dated HPA. A graph of one-year chords (page 19 of the Recap) illustrates the changes in implied HPA from July to August.

While stock market volatility grew, bid/ask spreads on longer-dated contracts narrowed. This both allowed for better Intercity spread quotes, as well as was the result of better IC spreads. Since my interest is in getting traders to think about these contracts as a hedging tool, I’m to try and change my focus from X16 to X17 contracts both in outright markets and in IC spreads.

That said, most traders either want to trade the front contract, or stay in front contract as it typically has lower volatility and tighter bid/ask spreads.

As such, expect my efforts to be bar-belled this month with a focus on X15 and X17 contracts.

As always if you have any questions, or trading axes, please feel free to contact me (johnhdolan@homepricefutures.com).

CME markets -post Aug release of CS #

Today’s Case Shiller numbers produced a number of surprises (as defined by falling outside the bid/ask range of the expiring Aug ’15 contract). Recall that since the CME futures cash-settle, in theory, market prices on the expiring contract should reflect consensus views on the numbers released the next day. In addition, since the measurement period covers April-June, unlike the S&P 500, none of the market noise over the last week impacted the index/closing price. ( In reality, I posted many of the quotes in an effort to drive bid/ask spreads into <=1 point to encourage trading.)

The following table shows index results (reflecting revisions in NYM and WDC), percent changes (1-,3-, and 12-months), the Aug ’15 quotes late on Monday, the actual index releases, and a color-coded analysis of whether the CS index results were surprises (again as defined above).

The regions in red say index results that were below the bid-side of the Q15 contracts, while those regions in green had index results that were above the offered side. Net of the 11 contracts, 3 saw index results that were higher than the last offer, and 5 say index results that were below the last bid.

This relatively high number of “surprises” reflects: a) that bid/ask spreads were tight, and b) that there appeared to be few other market participants quoting Aug ’15 contracts. As an anecdote related the second comment, I can’t recall the last quarterly expiration in which there was NO trading in a front month contract. That occurred this month.

The bottom portion of the table shows the Nov ’15 contract prices from yesterday vs. today. Here the impact of the stock market gyrations may have had some impact. Net, prices appear to be a wash (even with stocks up today) as there are 5 markets with higher mid-market levels as of this writing (around noon) with 6 that are lower.

Of more consequence, is that while Nov ’15 bid/ask spreads are about where they were on Monday (and on July 31), bid/ask spreads on longer-dated expirations have widened. I suspect that (eventual?) stability in the stock market will help bring bid/ask spreads in for the X16 and X17 contracts.

There have been no trades today, but there were two in the last few days – one in NYMX17 and another in CHIX15.

Finally, with the expiration of the Aug ’15 (Q15) contract, the CME has opened trading in the Feb ’17 (G17) contract. I suspect (as that’s my plan) that G17 will be quoted at a discount to X16 contracts. I hope that in having a Feb ’17 contract (recall that it settles using the Dec ’16 CS index values) we can start conversations (and trading?!?) about 2016 HPA based on Feb ’16/Feb ’17 calendar spreads.

As always, feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions, feedback or commentary.

Front Contract with < 2 weeks to expiration

Bid/Ask spreads on the front contracts (Aug ’15/Q15) have contracted to average just over 1 point.

All contracts are pricing in MOM gains (using mid-market values) of at least 1% (not shown), except MIA. The 196.3 CUSQ15 price is consistent with 4.9% YOY gains. Mid-market levels gains are consistent with a range of YOY gains from 2.1%(CHI) to 10.9% (SFR).

Seasonal factors (and momentum) also have Nov ’15 contracts priced higher than Aug ’15. All Aug/Nov calendar spreads imply additional increases in the indices.

With about two weeks until expiration, front contract bid/ask spreads are tighter than historical. So, if anyone has any trading ideas/axes, feel free to contact me (johnhdolan@homepricefutures.com).