Today’s blog headline reflects my ongoing thinking process as I transition to focusing on fewer expirations. In economic-speak, I’ve long worried that having 11 contracts, with 10-11 expirations, calendar spreads, inter-city spreads, options (for a while), and having quotes live 21 hours/day results in negative marginal utility – for a contract with limited volume. (It seems similar to having a 68th flavor of ice cream at Baskin Robbins. It may be great for marketing but it makes inventory management that much harder). What works for the S&P 500, $/Euro, and Treasury note futures trading may not be optimal for these contracts.
So, today I’ve switched my efforts to focusing on the November cycle of expirations (plus the front two contracts). My guiding thoughts on this move (and the earlier focus on Tuesday morning trading and limiting an options roll-out to four contracts) is that until trading volume increases, it will be important to channel any interest in home-price index trading to a more limited number of expirations. (Recall that over 3/4ths of the open interest is already in the November cycle of expirations, and that November has typically had the best markets.)
In to trying to focus fragmented trading interests, I would rather give more attention to the level of home-indices, and the implied HPAs (via calendar spreads) than to focus on the seasonal factors that impact the Feb, May and Aug contracts for the regional contracts.
My hope is that by narrowing my focus of contracts (by not posting my own daily quotes on K13, Q13, G14, K14 and K15), that other traders will also concentrate their attention on the remaining expirations thereby creating a deeper market. The issue of “depth of market”, whether in the form of posted volume, or the number of contracts a trader can expect to trade at a particular level, has long been on the top of any negative comments list about this market. In sum, it is my view that the overall Case-Shiller futures markets, would be better served with fewer 3×3 (# contracts bid/offered) markets than >120 1×1 markets.
In the past two years, better markets -either tighter bid/ask spreads, or quotes for larger amounts – has led to greater volume. (I sense that it’s a virtuous circle that more trades leads to better quotes which leads to more trades. This narrowing of my focus is an attempt to re-jumpstart that virtuous cycle.)
At first , you might notice an initial absence of quotes (or wider quotes) for the Feb, May and Aug expirations on the ten regional contracts. (I hope to continue populating quotes for all expirations on the CUS 10-city index for those interested in seasonal price moves). The contracts are still trading. I hope to post a set of all-expiration quotes from time to time, and will be happy to respond to an inquiry on one of these expirations. Other traders already have some quotes in these contracts (outright or via calendar spreads). While I would be happy to have someone else come in and “fill in the blanks” I’d encourage any marginal interest be channeled into the Nov. cycle contracts.
My hope is that, in time, the increase in trading in the November expirations will create demand for better markets in the other expirations.
As with any post, please feel free to contact me firstname.lastname@example.org if you have any questions on this topic or any aspect of home-price derivatives.