Basics – Restarting Intercity (IC) spreads

Intercity spreads (IC) are a way to express a view on the relative price moves between two regions for the same expiration.  They can be handy trading tools if one has conviction on the future performance of one region versus another, but where the trader doesn’t want to take as much risk on the absolute level of future index values.

For example, the HCI/NYM X16 IC spread was quoted 10.6/13.6 earlier today.  (As with calendar conventions the CME quotes the spreads by taIC Jan 6king the difference between the first value and the second.  Be careful as some brokers may have a different convention.)

The table to the right shows that the 10.6 quote could be translated a 203.0 bid for the HCIX16 contract and a 192.4 offer on NYMX16 (or 203.6/193).  At those levels the HCI bid represents a 7.9% increase over spot levels, while the NYM offer represents an 8.8% increase or a (rounded) 1.0% difference.  If the trader executed and held the 10.6 position through to maturity, and both indices gained 8% by Nov 2016, then the trader would come out ahead as the HCI long index position did better than 7.9%, while the NYM short index position did worse than 8.8%.

(An important note -this example has two indices priced at about the same level so similar percentage price moves translate into somewhat close point moves, and I’ve used an illustration where the eventual price move (8%) was close to the original levels.  That would clearly not be the case for two indices (e.g. CHI vs WDC) with dramatically different index levels.  As such 1:1 IC trades might need to be adjusted with additional outright trades, to balance notional exposures, if a trader wants to more precisely express views on percentage index moves).

Conversely the offer of 13.6 is priced such that HCI leg (that trader is offering to sell) is priced for a higher gain than the NYM index.

I’ve found that bar graphs such as thisCalendar Bar Jan 6 one are useful in interpreting how the CME market is pricing future gains across the 11 contracts.  Note that since NYM and LAX are such large components of the CUS-10 index that percentage gains on those contracts tend to be near the CUS-10 index.

Some contracts already have over-/under-performance (vs. HCI index) already priced in (much like outright contracts already have higher forward prices, priced in).   For example, an offer willing to buy HCI and sell LAX at even percentage moves would be off the market, as the bar chart indicates that the CME futures quotes have already priced in weaker performance by the LAX index (relative to  HCI).  Similarly, a bet that MIA will outperform HCI will be off the market, as stronger MIA performance is already reflected in the CME outright quotes.

IC trades can be used to express views on individual indices vs. the CUS-10 index (as above), within a region of the country (e.g. BOS v. WDC, or LAX v. SDG), or for any other combination (e.g. LAV v MIA as a possible tourist, foreign investor play).

A benefit of IC orders is where one leg (e.g. HCI) trades at very tight bid/ask spreads.  Then an IC order might translate into an outright level on the second leg that may be inside the prevailing outright level on that second leg.   Thus tight first legs (HCI) and good two-way IC spreads can help bring in outright spreads.  This is particularly useful in longer-dated contracts (especially in thinly quoted contracts) where the absolute level of forward index levels (on the second leg) is reflected in very wide bid/ask spreads.

So, I’d encourage traders to express outright (not calendar-derived) views either on longer-dated HCI contracts and/or IC spreads.  Either will contribute to tighter bid/ask spreads (or better depth) in the longer dated regional markets.

While the CME publishes quotes on IC spreads I understand that not all data vendors do.  Here’s a few of my quotes to give you a feel for IC spreads and for you to test translating IC spreads into implied out-/under- performance.  I’ve posted outright markets in HCIX17 and hope to populate some Nov 2017 IC spreads in the next few days.

  1. HCI_NYM X16 10.6/13.6
  2. HCI_CHI X16 60.6/65.0
  3. CHI_SFR X16 -13.2/-6.6

Finally, if you have an interest in trading, I appreciate that even those (limited number of) futures brokers that offer a platform for housing futures, post IC trading spreads.  One (new to me) broker that seems to have exactly what an IC spread trader might be looking for is Insignia (www. insigniafutures.com)

Feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions, or if you’d like to discuss any particular IC spread.  Restarting IC spread trading is a goal for me in 2015 so I’d love to get something started.