On Wednesday I walked through how one might interpret one intercity quote: the =BOS/NYMX15 market of -12.0/-8.0. Recall that the interpretation was that the bid and offer could be translated into a 2-sided view that the BOS Case Shiller index would outperform the NYM index by between +~2 and -1 %.
What if you want to know what the outright market prices imply and/or you care about more than just the Nov 2015 contract?
Using the same approach (i.e. comparing the difference between the mid-point of a market and the spot price for two different contracts, one can create a quick way to see about which contract the market is more optimistic.
In the chart to the right I’ve listed the closes, bids, mids, and ask quotes on the BOS and NYM contracts for all 11 expirations.
One can see the mid-/mid- comparison in the Nov. 2015 contract of 1.5%. By this approach this market (based on mid-point comparisons) is more bullish on the BOS than the NYM index across all expiration (as the percent outperformance expands.) The chart is also useful for pricing anomalies. (I need to look into the BOS/NYMQ13 markets.)
This approach might be a useful tool for those who want to observe or play timing differences between regions. For example, while some analysts are bullish on LAV, that one might make a case that the out-performance is not permanent (or in this case will last five years.). Similarly, while the NYM region has inventory and judicial foreclosure issues to resolve, in past periods the region has been the hub of home price spikes. Will NYM under-perform for five years?
I don’t know the answer to these questions, but I know that people are asking them. All I’m trying to point out is that intercity spreads might be a venue to express a financial opinion.
Please let me know if I can help. (email@example.com)