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.