Tag: spreads

2010: Projections vs Market Prices

With the expiration of the August contract (the June Case-Shiller data) we are now half way through 2010 and can begin to turn attention the to Feb  2011 contracts.  (Most of the time the front two contracts and the Nov cycle are where 90+% of the live quotes are.)

The thing that makes the Feb ’11 contract interesting is that it settles on the December Case-Shiller data.  As such expectations for year-on-year, or 2010 home price moves, can be tallied by a simple comparison of the Feb. 2010 Case-Shiller release and the CME contract values for the Feb. 2011 contract.

As the graph above shows, the Case-Shiller index for the 10-city index improved 1.8% through June, since the release, in February, of the December 2009 data.   Prices for the bids (squares) and offers (diamonds) for the Nov ’10 and Feb ’11 contracts are shown, with lines interpolating prices between those points and the most recent index values. 

As quotes in the Feb ’11 contract only begun to show after Aug ’10 rolled off, today’s  bid-asked spread is wide at 8.4 points.  Trading may remain challenging as we go through a period where the CS spot index has benefitted from the housing credit program, while sentiment has turned negative.  (See 8/31 blog).

Nevertheless the bid-asked spread translates into expectations of 2010 home price performance of -2.9% to +2.4%.   This lower bound is important as the recent MacroMarkets survey has economists calling for a decline of, on average, 2.08%.  (Contact MacroMarkets to register for their survey results  http://www.macromarkets.com/).   As there tends to be a reasonable distribution in those esitmates I would imagine that many are expecting declines of more than -2.9% (as implied by the 15300 bid for the Feb ’11 contract).

Stay tuned.  It’s a long way to February.

(While I am illustrating the CUS index and CME contracts, the same analysis can be applied to each of the 10 indices where CME contracts are traded.  Look for city-specific discussions in future blogs.)

Basics -Calendar Spreads

If you look at the CME Website for prices (see link) you’ll see a pulldown menu for quotes for either calendar spreads or inter-city spreads across all 11 indices.

 http://datasuite.cmegroup.com/dataSuite.htmltemplate=hsng&leadMonth=NYMK0&strategyType=SP&category=Housing&exchange=XCME&selectedProduct=NYM&selected_tab=real_estate_tab 

The calendar spreads are useful for expressing views about the timing and magnitude of price changes. For example, if one thinks that prices will be higher in Nov. 2013 than Nov. 2011, one could sell the spread (sell the front contract and buy the back contract) at “flat” (the contracts at the same price) or for some positive spread (spreads are always quoted in terms of the front contract relative to the back contract so a positive spread implies that the front contract is trading at a higher price). If between now and then the market starts to price in a rise in the index between Nov. ‘11 and Nov ‘13 the spread could go negative -resulting in a profit.   

                          
One caution on calendar spreads – at expiration the front contract will cash settle leaving you holding just the forward postion.          

                                          
Another note, some calendar quotes are just computer generated combinations of a correseponding bid and offer. For example if Aug ‘10 is bid 17000 and Nov ‘10 is offered at 17240, a spread offer in Aug – Nov. ‘10 of -240 will likely be showing. If executed, a computer program will “lift” the offer at 17240 and “hit” the bid at 17000, backing into the -240 spread.          

                                                                                                                                    
Finally, calendar spreads can be entered as GTC while inter-city spreads must be entered (and renewed, if desired) as day orders.