Tag: CUS

Front Contracts

I introduced a new graph in the May review that I think will help anyone looking at prices across the front three expirations.  I barely commented on the graph in the review.  Now, with the benefit of more quotes since month-end, and some tweaking of the graph, I’d like to go over it in more detail.

The graph shows the bid/ask/mid quotes -expressed as a percent of the spot index – for the front three contracts (Aug ’13, Nov ’13, and Feb ’14) for each of the 11 Case Shiller contracts traded on the CME (ten regional contracts plus the CUS/HCI 10-city index).  Aug ’13 is the front contract, the Nov. series is typically the most active, and the Feb ’14 contract will be settled on year-end Case Shiller index values, so anyone looking at market-implied index changes for 2013, should pay attention.  I sorted the contracts into my predefined areas of “Cold” (BOS, NYM, WDC, CHI and DEN) and “Warm” (LAX, SDG, SFR, LAV and MIA) regions to illustrate how performance between these two higher-level areas differs.

Some notes:

  • All regions show sharp increases through Aug and Nov ’13.  NYM represents the low while SFR has the highest forward prices.  This mirrors the performance of these regional indices over the last year.
  • The bid for Feb ’14 CUS contracts is 7.8% above spot levels, and (not shown) +9.8% above Dec ’12 values.  The Feb ’14 contract is thinly traded (even within the context of CME Futures), and the Feb ’13 prices were more “optimistic” last year during the summer than where CS index values ended 2012.  That said, if the Feb ’14 contract prices are correct, research teams will have to raise their forecasts (as Citi has already done) for 2013.
  • Quotes for the Cold regions are generally lower than for those in the Warm regions.  SDG and MIA are somewhat low, but on balance, forward prices in California (and LAV) far exceed those of the Cold regions, particularly has one moves into the Nov and Feb contracts.
  • Bid/ask spreads vary considerably across regions (with BOS and SFR having tighter spreads) in the Aug ’13 contract.  In each of the last two settlements bid/ask spreads in several contracts compressed to <1.0 (<0.5%).  Currently BOS (@ 1.8) and SFR (@1.6) are the best, with WDC (@ 6 points) the widest dollar spread, and DEN (@3.2.%) the widest on a percentage basis.
  • The Cold and Warm states seem to have different seasonal factors between the Nov and Feb contracts.  Generally, the Cold states have lower prices for Feb than Nov (and that shows in calendar spreads) while the Warm states are close to neutral (between Nov and Feb)
  • The Feb ’14 bid/ask spreads are generally much wider than Nov ’13 bid/ask spreads.  As these are the markets that reflect projected 2013 changes, they merit some attention (and need some help).
  • While the HCI/CUS contract has the highest open interest, CUS prices are the weighted average of two very different markets (the Cold and Warm regions).  They may be the best trading market but it’s hard to generalize what a view on CUS means given that the underlying components are so different.
  • Similar analysis of all contracts (where there are two sided-markets) in longer-dated expirations (to be shown at a later date) shows: a) a continuation of the Warm/Cold divide, but b) overall reversion to 3.5-4% HPA across regions.

As with all observation on CME Case Shiller futures, there is limited depth to the market (and very few trades), so all conclusions should be compared to more fundamental research.

I’d be interested in any third-party reactions to this graph, or the general topic of the direction of forward prices.  Please feel free to contact me (johnhdolan@homepricefutures.com) if you care to discuss.

 

 

CME Case Shiller Futures -post CS #’s

Prices on CME Case Shiller futures rose after the release of the March index numbers.  As highlighted in the table below, the March indices for five regions (BOS, LAX, SDG, SFR, and WDC) were outside the bid/ask range (above) of recently posted quotes on the expiring May 2013 (K13) contract.   One region(NYM) saw prices that were below the K13 bid/ask range.  This set of outliers a) contrasts with recent experience where the expiring CME contract bounded actual Case Shiller indices, and b) shows that there are trading opportunities, right up to the last minute, for those with strong views (or insight) on yet-to-be released Case Shiller indices.   While often those views are expressed in the front contracts, there were a handful of assorted trades on Friday  (May 24) in longer-dated contracts.

As of 11:30 (New York) there have been no trades today in the  CME futures.

Bids have increased about 2-3 points on the more bullish contracts (with the exception of CHI and NYM), with some further steepening in the front end of the expiration curves.  Offers are 3-4 points higher (or missing).

 

Inter City Spreads for Longer Expirations -4 Nov ’17 IC spreads

Friday I teed up ten intercity day orders for the May ’13 contracts.  While I’m open to continuing that discussion, today I want to focus on the other end of the expirations -the Nov ’17 contracts.

Unlike the May ’13 contracts where near-term outright price forecasts might cover a narrow range, the outright market for Nov ’17 are quoted on much wider bid/ask spreads.

The good news about inter-city spreads is that they can take two large unknowns (that is the absolute forward levels of two contracts) and reduce the risk to the difference between two contracts.  As such, inter-city spreads should trade narrower than outright spreads.  This tendency is more pronounced the wider (and therefore/typically/ the longer the reference contracts.  (In addition to showing the inter-city spread levels, I’ve shown the “arb” levels that the CME would generate by pairing outright bids and offers.  In all cases the inter-city spreads are well inside those levels.

The attached chart lists four interesting spreads. There are two large regions (LAX and NYM) that together comprise 48% of the CUS10 index (so high correlation with the index), and two more “challenging” regions where forward markets (CHI, LAV)  have tended to be thin and wide, and where the home price story is mixed.

All four represent an opportunity to view/bet/ hedge/ the value of the regional contract versus the CUS 10 index 4+ years from now.  By comparing the relative price improvements versus spot levels (not shown here but available for anyone looking to discuss) one can see that the HCI/LAX spread is quoted at levels that are consistent with LAX outperforming the HCI (CUS) index by 1.5-4.8%, while the NYM and CHI inter-city spread contract prices are consistent with underperformance of 2-5% (NYM) and 0-5%(CHI).

I added the LAV inter-city spread as recent blogs suggest a sharp debate over the forward performance of LAV, either on an outright or relative basis.  Some argue that LAV has huge momentum, that might carry forward into Nov ’17 prices, while others have written about LAV inventory and permits, and suggest that the LAV rally will fizzle.  The first group might consider selling the HCI(CUS) v LAV spread, while the second group (the LAV bears) might want play on the long side of the HCI (CUS) v LAV inter-city spread.  LAV is volatile, thinly traded, a small portion of the HCI(CUS) index, and trades at a relatively low dollar price – all of which tends to keep bid/ask spreads wide.  The same is true for the inter-city spread.

While I’m keen to respond to trade inquires, all traders win on tighter markets, and any contributions to that effort via posting lower offers or higher bids would be appreciated.

If you do have something particular to discuss (or ask about)  please feel free to contact me at johnhdolan@homepricefutures.com

 

May 2013 CUS Intercity Quotes – All 1 point Bid/Ask

To illustrate the potential of inter-city spread trades, I’ve posted 1.0 point bid/ask quotes for all ten CUS vs. Regional markets for the May 2013 (K13) contract that expires on May 27th. 

Inter-city spreads allow a trader to express a relative value view (as opposed to an outright view) between two regions for the same expiration.  In theory, since both parties are simultaneously entering a long and short overall risk may be reduced.  With several 1.0 point bid/ask spreads on the outright May ’13 contracts (e.g. BOS, CUS/HCI, LAV, LAX, and NYM) a) it’s a bit easier to get to 1.0 bid/ask spreads on some of inter-city quotes, and b) the inter-city quotes only impact a handful of the outright May 13 markets.

I’ve entered these as day orders to try and stimulate discussion on the overall topic of inter-city quotes -today.  Some traders have articulated strong views on the upcoming Case Shiller release.  This may be a less-risky opportunity for them to express their outlook.

If anyone wants to engage in a discussion about non-CUS pairs (e.g. BOS v NYM, LAX v SDG) for May, of for inter-city quotes on longer expirations,  I’d be happy to respond.  Please feel free to contact me (johnhdolan@homepricefutures.com).

InterCIty Spread CUS v CHI 50.0/51.0

To illustrate the potential use and impact of inter-city spread quotes I’ve posted a 50.0/51.0 bid/ask set of quotes for the CUS/CHIX13 inter-city spread.  (Click here to jump to the CME DataSuite page showing the quote or look for links in the right column of the home page.)

As of the time of this writing CHIX13 was 118.0/120.6 and CUS X13 was 168.2/170.8.  A 50 bid would be the equivalent of buying CUS at 169 while selling CHI at 119, while a 51 offer would be the equivalent of selling CUS at 169.6 while buying CHI at 118.6.  The inter-city spread trade allows for trading on “inside” prices while also reducing outright risk.  In my case, it’s a way to transfer a risk (position) from one contract to another. Others may evaluate it as a view on how CHI will perform against the 10-city index.

Some disclosure: while one might consider this trade as a spread trade and may even be margined as such, I would advise that traders also analyze it as two separate trades.   For example, the difference in prices means that a 5% move in each contract will not result in the dollar spread remaining constant.  (I’m willing to buy/sell extra CHI contracts if someone wants to do a price neutral trade – e.g. 3 CHI v 2 CUS)

I’d be open to such inter-city trades between other regions.  Feel free to contact me (johnhdolan@homepricefutures.com) if you’d care to discuss this trade or any other.

 

 

Recap of price changes post March release of CS #’s

The Case Shiller indices for Jan 2013 were released on Tuesday March 26th.  Much of the reaction in the CME prices was concentrated in the front (May 2013) contracts.  (A table of before- and after- prices for the CUS contracts is shown here, and a table of price changes across all regions is included in the Reports section or can be linked here. )

This Bid/ask spreads for the K13 (May 2013 expiration) that had averaged ~1.9 points moved out to 3.3 on index “surprises”.  That is, certain index results (e.g. NYM, MIA) were slightly stronger than prices suggested by the May 2013 contracts, while other (e.g. SDG, WDC) were weaker.   As a result the most pronounced CME price moves were in front-contracts in these four regions.  NYMK13, which had been 158.4/158.6 before the numbers traded at 162.0, and MIA improved from 151.8/154.0 to 153.4/156.8.  On the other hand, SDGK13 dropped from 165.4/168.6 to 162.8/167.8 while the bid/ask widened.

The widening in the bid/ask spreads of the front May 2013 contracts, spilled over (via calendar spreads) into wider bid/ask spreads in the May 2014 and 2015 series.

On average bids were up 1/4 point (across all regions), while offers were up 3/4 for overall slight improvement in prices and a general widening in bid/ask spread of 1/2.   66% of this widening occurred in the three May contracts (out of 11 total).

The BOS and SFR contracts were the only two contracts to show tighter bid/ask spreads (across all 11 expirations) post the CS index release.  (Thanks to those contributing quotes!)  BOS spreads compressed as bids raised while offers lowered,  while in SFR bids generally increased more than offers, and longer-dated offers in SFR dropped.

Spread widening in four contracts (DEN, MIA, NYM and WDC) accounted for 100% of the overall spread widening (help would be appreciated!)  As noted above, most of that widening was in the May series.

Having moved one month closer to the May expiration, I would expect that bid/ask spreads will compress in the May 2013 contract.  I hope to post a blog on inter-city spread quotes that might help there.

The other “angle” that I expect to develop is that the recent trades in the CUSX16 and X17 contracts have given some possible anchor to longer-dated contract values.  The debate as to factors behind home prices four years from now (e.g. new construction, revival of RMBS market, supply of shadow inventory as prices grind back toward 2006 levels, clarified role of GSEs, changes in lending standards, impact of possible removal of mortgage interest deduction, and level of mortgage interest rates) should all weigh on prices for the Nov 2016 and 2017 contracts.  I would expect (and hope for) some interest in calendar spreads and longer-dated inter-city spreads.

Please feel free to contact me (johnhdolan@homepricefutures.com) with any questions about the attached data, or any aspect of housing derivatives.

 

Early front contract tension -tight bid/ask

While sometimes it seems that traders wait for the front contract to have weeks to expiration before showing tighter quotes, trading this cycle looks to be different -and better.  Thanks to broader participation, widths of bid/ask spreads for the front contracts are inside those posted even the day before the Feb contract matured.  Not only are quotes tight, but the correlated expectations that dominated spot-versus-front contract prices across the regions, during the past summer is history.

I normally save this table for the run-up to contract expirations.  Given recent activity, it’s worth reviewing even with 2+ months to the Case Shiller release data that will be used to settle the March contract.

The table shows selected historical Case Shiller indices, and the recent CME bid, ask, and mid-market levels for all 11 March 2013 contracts.  The table also highlights the percent change between the mid-market price and Case Shiller indices from one year before expiration, and the spot index.

Bid/ask spreads are <= 1.0 point on 6 of the contracts.  I am aware of trades within the last few weeks in all 6 regions (w/ the exception of BOS), thereby giving further credence to the notion that tight spreads lead to trades, and that trades lead to tight spreads.  Only LAV and LAX (two of the contracts with the largest increase versus spot) are quoted wider than 3 point bid/ask spreads.

As big a story is the patchwork of percent returns (both 3-month and one-year) implied by mid-market quotes.  The regional diversification that is the hallmark of real estate brokers (“location, location, location) and the foundation for rating agency diversification models, is kicking in (just as volume in new RMBS deals is growing).

March mid-market prices are consistent with one-year returns that range from -2.25%(NYM) to +17.85% (LAV).  Mid-market quotes for March are consistent with four regions showing negative 3-month returns, while 6 are up.   That the CUS10 index quote suggest that overall prices will be about unchanged, hides the real story.

While traders are free (and encouraged) to express outright views, I continue to believe that (and am starting to see more use of) spread trades (both inter-city and calendar) as a way to reduce risk.  The pronounced seasonality in the March-June contracts has given rise to some sharp projected increases during the spring (even in contracts currently under pressure.)

As always, please feel free to contact me (johnhdolan@homepricefutures.com) if you’d care to discuss any aspect of this blog or trading in housing derivatives.

I would add that, to the extent I can, I will try to tweet trades (@HomePriceFuture) when I see them (but since the contracts are open 21 hours/day I may miss a few).   I would also encourage interested parties to join a relatively new LinkedIn group “CME Case Shiller Home Price Futures” if they’d care to chat with others interested in these markets.

 

Options -remember that the platform exists

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.

Pulsenomics/ Zillow home price survey

Today, Pulsenomics released the Zillow Home Price Expectations quarterly survey of >100 economists and real estate fans (including me), of home price forecasts for the next few years.  Click here for link to survey results.  This survey represents a break from prior ones in that the reference index for forecasts has switched from the Case Shiller National index to the US Zillow Home Value Index (ZHVI).

The change might result in small adjustments to forecasts.  While the ZHVI and Case Shiller CUS10 index have “generally” moved in the same direction over the last few years, they diverged in the runup and fall in home prices during the 2005-2008 period.  The CUS10 index also has seemed to show more variability over the last few years.   ( I welcome someone to write a guest column highlighting the differences and possible implications for forward pricing.)

(Note that rather than contrast the Case Shiller National Index (which is released quarterly) with the ZHVI index (which is released monthly), the graph to the right shows the monthly ZHVI index versus the monthly CUS10 index.  While this introduces yet another index, the CUS index is the reference for the CME-CUS futures contract so it may be more familiar to readers of this column.)

Net – the Zillow survey remains the most comprehensive survey of home price expectations that I am aware of.  Anyone looking to trade housing derivatives should be aware of the results (headline +3% for 2013, but read the entire release for details and color), and as importantly, the dispersion in the forecasts.

I leave readers to click on the pulsenomics link to see the charts and tables.  I’m going to do my quarterly badgering of the survey outliers to see if I can guilt them into a trade.

As always, please feel free to contact me johnhdolan@homepricefutures.com if you’d like to discuss the survey or any aspect of housing derivatives.

 

 

One-year forward markets

The recent Feb 26th release of the (December) Case Shiller indices sets the stage for year-end comparisons.  While the G14 (Feb ’14) contracts have been ignored until recently, they now facilitate one-year forward price comparisons.

The candle bar chart to the right shows the width of the bid/ ask spread (with the green bars representing mid-market prices) denominated in terms of percentages versus the recent Case Shiller releases.  So, for example, the BOS market is bid 156.4 (or +1.7% over the spot 153.81 BOS index), offered at 163.4 (+6.2%) with a mid-market value of 159.9 (+~4.0%).

As mentioned frequently in the recent past, the California markets (LAX, SDG, and SFR) all have forward prices that are consistent with stronger one-year HPA (Home Price Appreciation.)  New York and Chicago are two of the weaker one-year forward markets with BOS and WDC not far ahead.

The 10-city HCI index is the tightest market (in percentage terms) at (+4.1/7.4%) or (165.0/170.2) while the LAV market is the widest.

As mentioned there has been no trading in the G14 series to date, but now, as a reference tool/trading platform/ for 2012-2013 HPA forecasts, I expect that interest will develop, and bid/ask spreads will contract.  I expect that some of this tightening will occur as a result of inter-city quotes.  I am aware of four G14 inter-city quotes (in LAV, LAX, SDG and SFR) at better than “arb” levels.  The LAX IC market of -27.0/-22.2 is the tightest.  That market translates into LAX trading at between 0.6 to 3.0% better than HCI over the next year.

Please feel free to contact me on the outright G14 markets, the inter-city spreads that I cited, or any other aspect of this blog at johnhdolan@homepricefutures.com