With only one week to go before the (Tuesday, Nov 24th) release of the Case Shiller index results for September, I’ve taken a sharp pencil to tighten up bid/ask spreads in Nov ’15 (X15) contracts. Here’s a table of historical Case Shiller values and this morning’s contract quotes for the Nov ’15 CUS 10-city index and the 10 component regions. Recall that since the futures contracts settle on the CS index values announced next week, the futures should (in theory) reflect market expectations for what those 11 numbers will be.
Bid/ask spreads for the Nov ’15 contracts are all under 1.0, and average 0.67. The CUS (10-city index) contract is quoted at 0.2 difference (the minimum price move for these futures) while the SFR contract has the biggest bid/ask spread.
The dual impact of negative seasonal factors and declining HPA show up in ever smaller differences between last month’s Case Shiller indices and the Nov ’15 mid-market price levels. In fact, pricing on the CHI contract is consistent with a month-month decline in the non-seasonally adjusted index. (As an aside, year-on-year differences in futures prices still show implied HPA of 2-5% for 2015-2016, for all 11 contracts).
Annual gains (not shown) on the CUS (10-city index), as measured by comparing the mid-market value of the futures contract versus the index result for last year, are “expected” to be ~4.63% for the CUS index. Year-on-year gains should run between 1.8-1.9% on the low end (for CHI, NYM and WDC) to in excess of 10% (for DEN and SFR).
Over the last few years there have been occasions (recall that these futures expire quarterly) where the bid/ask either bracketed the actual Case Shiller index that was used to settle the contract, as well as times when the index results were outside the bid/ask spread in as many as 7 contracts. The possibility of a version of the second scenario (i.e. that futures are “wrong”) should have home price analysts comparing their model results versus futures prices looking for a money-making opportunity. At $250/point, the analysis seems worthwhile.
Recall that trading in the expiring contract stops at 3PM (NY time) on Monday. Other expirations will trade until 4.
Finally, as Nov ’15 goes into the record book, the CME will roll out a new contract for Nov ’20 expirations on Tuesday.
Please feel free to contact me (email@example.com) if you have any questions related to this blog or trading of these contracts. The contracts tend to be quoted 1×1 (i.e. a bid for one contract versus an offer of 1 contract) but I might be inclined to trade larger amounts. In addition, intercity spread order are possible if you think that one region’s results will diverge from another’s very differently that current contract prices “suggest”.