Tag: inter-city

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).

April 22 price updates, front contract table

With about one week to go until the April 30th release of the February Case Shiller indices, I thought that it might make sense to update price tables and graphs.  While volume has been near zero there’s been a relentless inching in of bid/ask spreads.  The BOS, LAX, MIA, SDG and WDC contracts all show average bid/ask spreads being about 2 points tighter than they were on March 30th.  The bid/ask contraction has been a function of two trends: a) very narrow bid/ask spreads in the front (May ’13) contract (see below), and b) a flattening in the longer end of curves as Nov ’16 and ’17 offers lowered.

The updated table/graph are located in the Reports section or can be accessed here: Graph  /  Table

While there’s been some improvement, the MIA, LAV and SDG markets have much more run to tighten.  However, as with other regions, traders seem to be waiting for the April 30th numbers to see how the interplay between seasonal factors, and recent improvement in home prices, is playing out.

As mentioned above, front contracts bid/ask spreads have tightened.  Four contracts (BOS, CHI, LAV and SFR) have bid/ask spreads of <= 1.0 point, and all contracts are <= 4.0 points.  Prices for three May mid-market contracts (BOS, CHI, and NYM) are consistent with a decline in index levels over the next two months, while five contracts have price increases of >1% priced in (by May).  Finally, open interest for May is 25 contracts.  This

 

This combination of (relatively) tight markets, a divergence of outlooks across regions, and a reasonable amount of open interest (across 8 contracts) has, in the past, been a good catalyst for trading.  I keep pushing inter-city spread trades as a reduced risk approach to trading.  Feel free to contact me (johnhdolan@homepricefutures.com ) if you have a proposal you’d like to discuss.

 

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.

 

Some Inter-city Quotes

Inter-city quote spreads may be a great way to express a view on the relative performance of two contracts for a given expiration.  The outright level of home price moves may be reduced with a simulaneous buy and sell, execution risk is reduced as the buy and sell are done at the same time at a pre-determined spread, and the inter-city spread quote is sometimes tighter than outright buy and sale.

Here’s a sample of recent inter-city quotes.

Recall that IC spreads are quoted just as calendar spreads with the front contract being bid (in the case of an IC bid) and the back contract being offered.  So in the first quote, the bidder is offering to buy the HCIK13 (aka CUS) contract at 4.2 points above where he would simultaneously sell the MIAK13 contract.  The reverse of that trade (a sale of the HCIK13 contract and purchase of the MIAK13 contract) is offered at 5.8 points.  In effect someone wanting to express a view on the relative performance of the Miami contract versus the 10-city index (for May ’13) can do so in a relatively tight bid/ask spread.  This view could later be reversed, or since both sides of an inter-city spread expire on the same day, run to expiration.

As both the HCI and MIA contract prices imply different price appreciation (or depreciation) relative to their respective spot indices, the HCI/MIA IC market is a way to express a view on how MIA will perform relative to the 10-city index.  (I leave it to the reader to work out the math, but I would conclude that the 4.2/5.8 market brackets the MIA outperformance (vs HCI) to 0.21% to 1.26%.)

(Note: the 4.2 bid, and all other quotes in red are what I refer to as “arb” quotes.  Those are automatically generated by the CME from outright bids and offers.  Please contact me if interested to discuss possible inside quotes.)

In theory, IC bid/ask spreads should be tigher on a) shorter contracts, and b) contracts between highly correlated contracts.  The later is especially useful as IC spreads can be used to take what might be a large risk (e.g. the outright level on the LAX contract in Nov. 2015) and reduce the risk by narrowing the question to the relative performance of LAX vs. SDG for the same expiration.  As above, anyone wanting to express an opinion on the relative performance of LAX vs. SDG can express that via the IC spreads.

Inter-city spreads can be quoted between any two contracts with the same expiration.  As such there are a ton (actually 2,420) of possible inter-city markets, and while some may not be meaningful, there are still too many to continually quote.  Please contact me  (johhdolan@homepricefutures.com) if you have a particular quote that you’d like to see (at inside arb levels) or if you have any questions on after reading this blog.

 

 

Price Changes for early 2013

The price quote changes since Dec. 31 continue trends that persisted during the 4th quarter of 2012.  This table (excerpted from a much larger table in the Reports section showing all 11 contracts) shows the price changes for the HCI/CUS 10-city contract since year-end.

While it’s easier to show one table, one has to be careful about assigning observations from this 10-city average to the underlying regions.  In fact the trend of “A tale of two regions” has persisted since Q4 and into 2013.

While there have been few trades, quotes on the “warm” states (the 3 California markets, Las Vegas, and Miami) show higher than average increases, while the “cold” states (BOS, NYM, WDC, CHI and DEN) have tended to show lower increases and outright declines.

For example, using YTD changes in the Nov 2014 (X14) contract, bids have improved in LAV (+4.2), LAX (+2.8), MIA (+2.8), SDG (+4.0), and SFR (+6.0).  By contrast, BOS (-1.2), CHI (0.6), DEN (0.0), NYM (-3.0), and WDC (-2.0) all show continued relative and/or outright weakness.

So, while the bid on the CUS contract is +2.0 since Dec. 31, only two contracts (LAX, MIA) have price changes that are within two points of that “average” change.  We have more of a bi-modal distribution where the mean may not be terribly….meaningful (at least to traders in each region).

A continuation of these trends would suggest that inter-city spread trades within the two larger regions (warm vs. cold) could be done on smaller bid/ask spreads, while inter-regional, inter-city spread trades (warm vs. cold) might have some additional risk (and wider bid/ask spreads) while this divergence plays out.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you have questions on this blog, or the report showing tables for all 11 contracts.  I’m open to hearing thoughts/ trade proposals on any inter-city spreads.

That said, I expect that the focus will be on the Feb ’13 contracts that expire on Monday.   Bid/ask spreads have compressed to ~2.0 points (on average, CUS =1.2).  Inter-city spread trades are another way to play the expiring contracts.  I’m open to ideas there also.

 

 

Round 3: Intra-Regional Comparisons

Here’s a last idea on another way to approach inter-city spread trades.  We’ve looked at one trade (BOS/NYM Nov 15) at the beginning of last week, then a calendar strip of trades between two cities across expirations (at the end of last week).  One can compare these calendar strips across cities within highly correlated regions to compare forward mid prices to see if the markets are favoring one city or another.

Here’s two graphs – one for the Northeast cities and one for the California markets.

In both graphs the numbers shown are the difference between the mid-market quotes minus the spot index in percentage terms for the two listed cities (as of Friday).  As with inter-city spreads, the numbers shown are the first city minus the second.

So, for example, the 1.9% premium of BOS over NYM is the difference between the 20.3% value for the BOSX17 (mid)/spot and the 18.4% NYMX17 (mid)/spot.  The 1.9% premium of BOSX17 over NYMX17 (both versus spot) is consistent with the view that the market expects BOS to outperform NYM over the next 5 years.

WDC has a better outlook that BOS, and by extension, WDC has higher price growth than BOS.

I would offer two important qualifiers:

1)  While BOS outperforms NYM, it’s an intial burst, and then remains constant, while the comparisons of BOS and NYM versus WDC are consistent with WDC improving over time.

2) These graphs can change with relatively small changes to the underlying outright markets.  For example a drop of 2% in the offered side of any contract will reduce the mid-value by 1%.  Since many of the longer-dated contracts are quoted with 5-6% bid/ask spreads, such volatility (especially on longer contracts) is possible.

For the California markets LAX and SDG are a toss-up while SFR levels are consistent with higher expected price increases versus both LAX and SDG.

These mid-mid comparisons can be the starting point for inter-city spread quotes.  I’m happy to work with any traders to translate relative price performance into dollar-spreads for inter-city quotes.

Feel free to contact me (johnhdolan@homepricefutures.com) to discuss these spreads, this analysis, or any other regional combinations.

 

 

 

 

Basics: Intercity Spreads: How to read them: Boston/New York example

If inter-city spread trades are going to be a focus for 2013 then it might help to explain what they mean.  That was the “constructive criticism” from one reader.  Point noted.

Let me use a rivalry that New York traders might relate to: New York vs. Boston.  After all saying that the BOS/NYMX15 spread is -12.0/-8.0 doesn’t convey much.  The spot indices and futures contracts trade at different levels so the question is how can one translate an intercity quote into something more relevant.  The answer is that just as with calendar spreads, intercity quotes can be translated into relative HPA comparisons.

The table (to the right) shows how one might evaluate the BOS/NYMX15 intercity spread.  Recall that all spreads are quoted front value versus back and that most intercity spreads (except the CUS/HCI 10-city index) are shown in alphabetical order.  Thus one would talk about BOS/NYM, not NYM/BOS.

That table shows the spot levels and Nov 2015 markets for both BOS and NYM.  The mid of the BOSX15 market 172.7 is shown and the percent of that number over the spot value (150.6) is also shown (14.65%).  Thus one might say that the mid-market quote for the BOSX15 contract is consistent with a rise of ~14.6% in the BOS Case Shiller index by the Nov 2015 release.

The intercity bid (-12.0) and intercity offer (-8.0) would be equivalent to OFFERS on NYM of 184.7 and BIDS of 180.7 when compared to the BOS mid-market.  I’ve added emphasis and color-coded the prices to remind readers that an intercity bid is the difference between a bid on the front contract combined with an offer on the back contract.  Thus the -12.0 bid would be consistent with a 172.7 bid for BOS and an OFFER of 184.7 on NYM.  Similarly, the -8.0 intercity offer is consistent with a 172.7 offer on BOS and a BID for NYM at 180.7.

Given these “implied” 180.7/184.7 quotes on the NYMX15 contract, price relative to spot can be calculated in the same way as BOS above.  The implied 180.7 NYMX15 bid is consistent with a rise of 12.83% over NYM spot (160.15) while the implied 184.7 NYMX15 offer is consistent with a rise of 15.33% over the NYM spot.

By comparing the 14.65% rise in the BOSX15 contract with the 12.83%/15.33% rises implied by the intercity derived NYMX15 quotes one can translate the -12.0/-8.0 intercity BOS/NYM quotes into something that says “the intercity seller is quoting a level where BOS will outperform NYM by 1.82%, while the intercity bidder is quoting a level where BOS will outperform NYM by -0.68% (so under-perform)”.

One can take implied out-/(under-/performance and solve back for intercity quotes that would be consistent with one’s views.  In the table I’ve reversed the algebra to solve for the level where BOS would out-perform NYM by at least one point -any intercity quote wider than 12.5 points.  Similarly, one can solve for the level at which a seller of the intercity quote (selling the front contract relative to the back) would see NYM under-performing BOS by at least 1% or -9.3 points.

Net, the -12.0/-8.0 quote is consistent with a view where the bidder believes that BOS will outperform NYM by almost 2 percent, and the offer is consistent with the view that the seller believes that NYM will underperform BOS by only a small amount.

Of course, any combination of regions and expiration is possible and total over/under-performance can also be translated back into implied HPA differences.

Note that the -12.0/-8.0 intercity market at four points is tighter than either outright market (12.6 points on BOS and 9.0 for NYM) and MUCH tighter than an “arbitrage” market of the two contracts (-18.6/3.0 or 21.6 points, or the combination of the two outright bid/ask spreads).   This is the relative attractiveness of intercity spreads as a way to potentially develop market interest.  Recall that an intercity trade results in limited outright market risk (the notional values aren’t the same, an issue that would be most pronounced in an LAV/WDC quote), and no calendar risk.  Since BOS and NYM (much like LAX and SDG) are also highly correlated (see upcoming blog) the risk of one contract moving very different from another is reduced.

Net, one can take a view on RELATIVE movements between two regions for a fraction of the risk of the outright risk on either region (particularly if the two regions are highly correlated).

I’m open to discussing this blog, and any other combination of intercity quotes.  Feel free to contact me at johnhdolan@homepricefutures.com.

 

 

Basics: Selected intercity quotes for Nov 2015

I’ve mentioned before that I think inter-city spread trading might be the key to growing volume, liquidity and interest in the CME Case Shiller futures for 2013.  Here’s some quotes for the Nov 2015 contracts:

Recall that the bid side of an inter-city spread is the front contract minus the back contract.  I’ve colored the intercity bid in green (and the offers in blue) so that one can compare the intercity quotes with what I refer to as the “arbitrage quotes”.  (An example of an “arbitrage quote” would be the bid between HCI (now the label for the electronic trading in the 10-city CUS contract) and the NYM contract.  The 177.4 outright bid on HCI (shown here, not necessarily live) minus the 185 offer on NYM, would be -7.6 points.  The “arbitrage” offered side would be 9.6.   The intercity quote (-3.0/2.0) is much tighter.

The pairs shown represent either the two largest markets (NYM and LAX) against the CUS/HCI 10-city index, or intra-region (LAX/SDG and BOS/NYM) that have shown high correlations.  (More next week).

Quotes can be found on the CME website http://datasuite.cmegroup.com/dataSuite.html?template=hsng&leadMonth=CUSG3&strategyType=IS&category=Housing&exchange=XCME&selectedProduct=CUS&selected_tab=real-estate  Scroll down on the “Spreads” pull-down menu to move from calendar to inter-city spreads.  While many inter-city spreads will be posted, the vast majority are “arbitrage” quotes that are automatically populated by the CME.  According to my filters, these four quotes are the only non-arbitrage quotes posted as of 9:30 Friday morning (Feb 1.)

I’d appreciate any reaction to these quotes, or inquiry on other combinations (or expirations).  Contact me at johnhdolan@homepricefutures.com if you’d care to discuss or like to see other quotes.