spreads – HomePriceFutures.com

Observations on Bid/Ask spreads -1 Year to run

I’ve compiled an interesting set of data that I’ll use to illustrate how the CME S&P Case Shiller home price index futures have traded over the last 7+ years. It may help traders understand how to better trade the contracts, as well as quirks within the contracts. I will be blogging about over the next few weeks, to include an analysis the robustness of contract prices in forecasting, contract biases, and volatility. I’m open to ideas on what readers might want to see, and would be open to slicing and dicing the information to address any longer-term questions.

I’ll start with a presentation on bid/ask spreads for a one-year horizon. (Views using other time periods to follow).

The graph below shows the bid/ask spread on the one-year forward contract at the point nearest the quarterly expiration cycles that I could find. For example, the information for Nov. 2012 shows the difference between the bid and offer on the Nov 2013 contract. (The bids and offers come from information I’ve tallied over 7 years as market maker). Spreads have been compiled for all 11 regional contracts (the 10-city index as well as each of the ten regional components). There are 29 quarterly observations for all 11 contracts (except in May 2015 on where 7 quotes can’t be found. Note gap in graph for some regions.).

I’d draw a few observations from the graph:

Bid/ask point spreads have generally compressed since 2013 ( with the narrowest bid/ask spreads, for all 11 regions, having occurred in Nov 2017 (for the Nov 2018/X18 contract)). I attribute this first to getting past the large rally that started in May 2012. The strength of that rally created uncertainty about how much indices might rise, after falling and wandering around lows for 3-4 years after Financial Crises. Tighter bid/ask spreads since then seem to have been: 1) a function of greater participation by third parties, 2) greater confidence in my willingness to post tighter spreads, and/or 3) lower expected volatility. All three factors, and the resulting tighter spreads, are conducive to increased trading.
Note that bid/ask spreads are shown in points. Since some indices (and contract prices) are now double what they were in 2013 (e.g. the SFRK13 (May 2013) contract had a mid-market value of 132.3 in May 2012, vs. a spot index level today of 267.24) so bid/ask spreads on a percentage basis have narrowed even more. (See Graph in Reports section showing bid/ask spreads in both points and percent, or access here). BTW -The widest % spread across all 11 regions. in Nov. 2017 was 1.39%.
Bid/ask spreads have for the HCI 10-city index (shown in red) have generally had the tightest bid/asks spread. LAV and DEN have recently been the tighest as prices have not sold off as much as other regions.
All regional spreads exhibit “seasonality” in that bid/ask spreads have been tightest on November expiration cycles. (The one-year forward May contract has tended to be the widest). The relative narrowness in November contracts seems to be a function of Nov being the longest contract. As such, it has more time to attract open interest which may be important as traders have a vested interest in quotes.
I’ve tried to be more “democratic” about bid/ask spreads over the last year (putting a personally-imposed cap of bid/ask spreads for much of early 2018), and the distortion between May and Nov quotes (as well as other quarters) has been less pronounced over that last 15 months. I’m trying to promote more trading in Feb expirations, particularly in OTC trades, as that expiration references year-end Case Shiller values. As such, Feb contracts will be better in sync (from a timing perspective) with the term that most forecasters use (i.e. year-end numbers).
HCI bid/ask spreads seemed to bottom out at ~1 point bid/ask spreads in 2015, 16 and ’17, but then widened this past November (2018). I attribute that to the large sell-off seen across many contracts as California contract prices collapsed, and that I’ve written about in past blogs: CME Price declines since Sept 5 and Diagram to reflect changes in forward SFR markets. Bid/ask spreads have continued to widen since early Nov as these contracts prices have not found a bottom (i.e. a level where third-parties will buy). Only when we see two-sided interest would I expect bid/ask spreads to tighten back to mid-2018 ranges.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions from this blog, have any ideas how to analyze this new data, or have any questions related to hedging home price indices.

Recap of June CME Case Shiller Futures -June 2018

A recap of activity in the CME Case Shiller home price index futures has been posted to the Reports section. You can click here to access. The recap includes end-of-month prices, and price changes for the last month, tables on volume, open interest, intercity spread and calendar spread markets, as well as suggested one-year put option quotes.

Additionally, a few new pages have been added to the Reports section to include: Volume in Case Shiller futures since 2006, Open Interest since 2006, and graphs linking historical Case Shiller data with contract prices, for each of the 11 regions. In addition, the mid-June regional review had suggested option pricing for multiple strikes and expirations by region.

Here are the key point from the recap:

–There were 15 futures contracts traded in June in 3 regions (DEN, LAV, and SFR) across 5 expirations. There were no options trades.

–Activity picked up with especially in SFR with 9 trades and the tightest bid/ask spreads. The SFRX22 contract was quoted much of the month with <3 point bid/ask spread.

–For June, bids and offers were higher across many regions (except NYM, which fell ~2 points). Much of the move took place after CS #’s were released on June 26th.

–For the first time in a few years, there were 2-sided quotes in all 121 contracts.

–Bid/ask spreads widened slightly across all expirations.

–Longer-dated contract bids rose, raising implied HPAs, albeit from still very low prior levels.

–OI on futures rose to 39. There are three regions (BOS, MIA and WDC with no OI.)

–Home price index futures contract for Paris to be rolled out this fall.

–I’ve received inquiries on hedging Seattle risk. Looking for OTC counterparties.

–Added to Reports website section – Vol/OI since 2006, price graphs on all contracts

Please feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions on this recap, or any aspect of hedging home price index risk.

Thanks, John

Sept CME Case Shiller Futures/Options update -27 trades

I just posted a recap of activity during September in the CME Case Shiller home price futures (and options) contracts. You can find the recap in the Reports section or link here. The recap cover 27 pages and includes an updated section where information unique to each regional contract (e.g. graphs, prices, volume, open interest, implied HPA and suggested put offering levels) are presented on a separate page for each region. (See example below).

The highlights of the report include:

–There were 20 futures contracts traded in Sept across 5 regions and 6 expirations on 7 dates.

–Bids and offers generally rose across most regions and expirations (except MIA), particularly after Sept 26 CS #’s.

–Bid/ask spreads tightened dramatically, particularly in longer contracts. However, spreads remain wider-than-normal in front contract (~2pts).

–There were bids in all 121 contracts, and two-sided quotes in all contracts out to Nov ’18, and then X19 and X20.

–OI remained flat at 45 as several trades appeared to be unwinds.

–For example, close out of SFRX20 open interest led to wtd. avg. of OI to drop from 1.20 years to 0.92.

–OI remains very concentrated in November expirations (82%).

–There were 7 option trades, again in DENG18.P2000.

Please feel free to review and share (via sending links) the recap. Feel free to contact me (johnhdolan@homepricefutures.com) to discuss the themes addressed in this report.

Thanks, John

Recap of June CME activity posted

I posted a recap of activity in the CME Case Shiller home price futures contracts for June. You can access in the Reports section or via this link.

The 28-page report contains numerous tables and graphs of relevant information, including a section with graphs, prices and put option quotes by region. For example this table shows price changes (aggregated across expirations) by region, and the change in spreads (positive is tighter) by region, for contracts with two-sided markets in both May and June.

Highlights from the recap include:

–There were (at least) 13 futures contracts traded in June across 3 regions and 3 expirations on 5 dates. (I’m missing details on one trade)

–OI grew to 51 (from 48). OI remains very front-loaded (1.20 years, average-to-expiration) and remains concentrated in the November expiration cycle (69%).

–Bids and offers generally fell across most regions and expirations. Offers dropped on Aug ’17 contracts after the June release of CS #’s suggested that Aug contracts had been priced too optimistically. Lower front contract prices tended to translate into even bigger drops on longer-dated contracts, thereby lowering implied HPA.

– Bid/ask spreads (on contracts that had two-sided markets in both April and May month-end) tightened slightly.

–There are two-sided bids in all contracts out to Nov ’18, but then primarily just bids (as changes in those levels drive closing prices).

–There were no options trades (but a spreadsheet of put option quotes across all regions, and for a variety of strikes, for X17-X18 contracts was posted in a separate blog

Feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions or trade ideas.

Thanks,

John

May recap of activity in CME Case Shiller futures posted. See option offerings!

I posted a recap of activity in the CME S&P Case Shiller home price index futures and options for May. The recap is in the Reports section or one can link here.

The key themes in recap include:

–There were 12 futures contracts traded in April across 6 regions and 4 expirations on 4 dates.

–OI fell to 48 as 21 May contracts expired. OI remains front-loaded (1.46 years, average-to-expiration) and is concentrated in the November expiration cycle (83%).

–Bids were up strongly for the second month in a row across most regions. Gains are primarily in the shorter expiration contracts with implied HPA gains tapering off dramatically after Nov ’18.

–Bid/ask spreads (on contracts that had two-sided markets in both April and May month-end) widened slightly.

–There are two-sided bids in all contracts out to Nov ’18, but then primarily just bids (as changes in those levels drive closing prices).

–No options trades.

–I’ve introduced suggested put offerings across a wide range of regions and expirations in the separate regional contract pages. Think of as a template to prompt discussion. I’m open to quoting other strikes, or calls, in response to specific inquiries.

Net, the CME prices (and this market maker) have been chasing the ever-increasing optimism on the outlook for home prices gains in 2017. Of interest to me, is the strength in implied home price gains over the next 12 months, versus the lack of enthusiasm (so stronger bids) in longer-dated expirations. While slower implied HPA might be function of low inventory being resolved over the next few years (either due to construction, institutional buy-to-rent programs being open to selling, a fear of higher interest rates, or underwater owners getting their head above water as prices rise), my sense is that the lower forward HPA primarily reflects an imbalance between forward buyers and sellers. That is, for every inquiry I get looking to buy X20 contracts, I get 10 asking about selling.

Beyond that observation, a key takeaway from the recap is my rolling out suggested offering levels on almost 200 puts (11 regions * 6 expirations * 3 strikes). My focus has been on slightly out-of-the money puts. I’d love to build a book of inquiries on such combinations, but am open to other expirations, strikes and calls.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you’d like to discuss any aspect of this report.

Thanks,

John

How to trade on possible impact of Trump election on home prices

Much has been written elsewhere on the possible impact of a Trump Presidency on home prices. There are macro issues (e.g. mortgage rates and the fate of the GSEs) as well as possible relative value regional issues (e.g. who will benefit from increased spending on infrastructure vs. who will be taxed to pay for it). I leave all of those very timely, important discussions for others to host.

The angle I’d like to address here, is “how does one express a view (financially) if they feel a certain way on either category of issues?”

This is where CME Case Shiller home price futures may play a role in two different dimensions.

First, outright market levels, across the CUS 10-city index and each of the ten regional components, allows one to express an opinion on the absolute level of any particular index. I’ve picked the Nov ’18 (X18) expiration series as: a) two years should be enough time for any changes to play out, b) it’s the longest contract (by expiration) that has regularly had two-sided markets, c) comparing Nov ’18 to today avoids much of any seasonality (but not all) and d) more germane to the second point I’ll make, there are intercity quotes for all regional pairs with the CUS 10-city index.

The chart below takes the CME quotes and converts bids, asks, and mid-market levels into percentages versus the spot index. The “cold” areas (e.g. the Northeast, Chicago and Denver) are to the left, the HCI (CUS 10-city index) is in the center, and the rest are to the right.

Note that all 11 contracts are priced at levels that are about 3-9% above spot levels. Implied HPA has slowed but has not turned negative. DEN and LAV are priced for the highest gains, while NYM, WDC and CHI look weaker.

One can trade any of these contracts on an outright basis, particularly if they have a view on home index changes over the two years that are different than this chart reflects.

However, and this is my second point, there may be traders who are not comfortable with an outright view but they have certain strong ideas about future levels of one region versus another. For example, some might argue that President Trump might be positive for LAV (home to construction workers), DEN (extraction industries) and MIA (where he’ll likely spend time) and less so to WDC (smaller government) and California.

The middle bar in the candle bars below express (a version of) the differences in the above chart – shown as CUS gains minus regional gains – hence DEN is shown as negative as CUS gains are lower DEN.

The top and bottom value to the candles are the implied gains from quotes on intercity spread contracts. That is, one can enter into a trade where one can simultaneously buy (or sell) the HCIX18 (10-city index) contract while selling (or buying) a regional contract, at an agreed upon spread.

While those spreads are quoted in terms of points, one can convert those point differences into implied percentage differences. (See my Sept 28th blog for a more detailed explanation of IC spreads.)

With IC spreads one can express a view about relative price moves with much less outright risk. Note though, that as with outright trades where it’s not enough to think that home prices will be higher two years from now, as that’s already priced into the X18 quotes. The same theme applies here. That is, it’s not enough to think that MIA, LAV and DEN will outperform (or NYM, WDC, or CHI will under-perform) as that is already priced into IC spreads.

What a trader/hedger must determine -both on outright and IC trades – is whether the level implied by current quotes is above/below their expectations.

A note, I’ve only posted quotes on CUS vs. regional pairs but any regional vs. regional pair can also be traded electronically. Let me know if you have any interest in such.

Furthermore, in addition to outright and IC spreads, please know that one can also trade calendar spreads (e.g. Nov ’18 vs. Nov ’16, or Nov ’20) for any contract.

Finally, options (both puts and calls) can be quoted on CUS, NYM, CHI and LAX. I’ve had a number of inquires from traders looking for options on the other regions. The CME seems to be working to make this happen.

Net, there’s a variety of tools for traders to express views on how a Trump Presidency (or any other factor) might impact home prices both to outright levels, and on relative value.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you’d like to discuss this piece or any trading axes.

CME Case Shiller Futures Recap Post Oct 25 Release of CS Indices

I apologize for the delay in reporting the CME market reaction to Tuesday’s release of the Case Shiller #’s.

The table below highlights changes between Oct. 23 and today (Oct 26) to the Nov ’17 contracts.

On balance price levels (across all expirations) are ~<0.3 points lower, but certain regions (LAX, SFR) were up, while some (DEN, LAV) were much lower. (Note that there were modest price revisions to NYM and WDC indices but no meaningful move in the futures contracts.) My sense is that any price declines are the slightest bit more concentrated in longer expirations as offers on calendar spreads have inched lower.

There are 85 bid/ask spreads quoted (from a total population of 11 regions * 11 expirations =121) and those spreads have converged back to slightly tighter than Monday. Most of the tightening has occurred in the front three expirations. Of note, bid/ask spreads for the front contract (Nov ’16) now average <1.0 point.

Intercity spreads quotes are available for Nov ’18 expiration on the ten pairs of regions vs. CUS (10-city index).

There have been ten trades this month, but none since the CS #’s were released.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions or trading axes that you’d like touted.

What Homeowners (and markets) are thinking

Pulsenomics recently published their semi-annual survey of homeowners. (You can order a complementary copy here ). The 18-page report is chock-full of surveys (using great graphics) on what people think about home ownership, willingness to buy, and (importantly for traders here) outlook on prices. The survey participants are divided into homeowners vs. renters, AARP members vs. Millennials, and many other ways. In short, I’d argue that anyone looking to trade CME Case Shiller home price index futures should allocate a good block of time to work through the findings.

The only thing that’s missing is an action plan should you agree/disagree with any of the home price forecasts for the next year. Fortunately CME calendar spreads may be the best publicly quoted market where you can express a different view.

Now, let me first caveat that the Pulsenomics survey references Zillow indices, while the CME settles on values from Case Shiller indices. Second, there may be many reasons why survey results might differ from market-implied HPA. That said, the CME contracts may be the best way to express an opinion on HPA for 2016.

The table above shows recent market quotes for the Feb ’17 and ’18 contracts. This is relevant to a discussion of 2016 HPA as both Feb contracts settle on the value of the Case Shiller index for the period ending in December. Thus, one can compare outright markets, or mid-market vs. mid-market prices to get a sense of percentage differences between the two contracts (that reference Dec ’16 and Dec ’17 values). (A caution -indices can be revised after the initial publication).

First, note that the mid-market of Feb ’18 contracts is higher for all 11 regions than for the Feb ’17 contract. Differences (expressed in percentage terms) range from +2.4% for WDC to +4.3% for DEN. Note also (in a point made in the Pulsenomics report) that the percentage gains are generally much lower than the most recent 12-month change (with the exception of NYM and WDC which are coming off under-performance vs. peers).

However, rather than looking at mid- to mid-market prices, a market (the calendar spread market) also exists where instead of selling (or buying) futures in one expiration while trying to simultaneously buy (or sell) contracts for a different expiration, one can enter into trades to execute the two sides in one trade, at a defined spread. Those price differences can be converted into percentage differences (and are shown in the columns to the right).

So, just as with outright futures, one can observe and/or enter a trade not to express a view that home price index levels will be higher in 2018 vs. 2017, but by how much. One can also trade one calendar spread versus another, but again the DEN contract already has priced in the highest gains (i.e. 3.8% on the bid side) so one would have to consider (in this instance) how much DEN will outperform another region.

I’ve posted 1×1 markets (one lot bid vs. one lot offered) to prompt discussion. I’d be open to facilitating larger-sized trades, and/or to providing quotes at levels inside those shown to further stimulate this conversation.

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

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.

Stocks vs. Home Prices -moved back to “normal”

I’ve been trying to get traders to react to volatility in the stock market by getting them to challenge whether such price moves change their expectation of forward home prices. While past blogs have suggested that the correlation has been weak, price moves (albeit mostly mine) since year-end, have shown much more of a correlation. The question to readers is – is this correct, or should home price futures trade (in theory) in their own world, OR be even more impacted by the level of the stock market.

The graph below shows a scatter diagram of the S&P500 index versus closes on the CUSX16 (10-city contract for Nov ’16) for three separate periods: Sept 1 -Nov 30 (blue diamonds), Dec 1-30 (brown squares) and since year-end (green triangles). Trend lines for each of the three periods are overlay-ed on the scatter diagram.

Clearly the slopes of the scatter diagrams have turned from a weak negative correlation (?) to positively sloped. The most recent scatter diagram also appears tighter. While this might be of more relevance had there been numerous bids and offers, many are mine, so what this reflects has been more of my personal pricing strategy. I write this here to challenge other traders into commenting that the slope should be flatter or steeper, or that the correlation should be higher or lower.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you care to discuss, or propose a trade to take advantage of a different approach.