I believe that the CME markets saw their first option trade for 2016 over the last few days. Eighteen puts on the CHIQ17 120 strike traded (FYI CHIQ17 = 134.6/139.4 today) at 2.0 points.
This trade played out in a manner consistent with other inquiries. A buyer of slightly out-of-the money, relatively short-expiration puts approached me looking for a hedge to certain real estate exposures. We negotiated prices offline and then executed trades on the exchange. (I have to give a shout out to Insignia Futures for their willingness to post and clear option inquiries.)
Consistent with other inquiries – and out-of-the money options in general – while both parties believe that CHIQ17 settling below 120 is low probability, there may be benefits to the put buyer in hedging (e.g. lower interest rates on bank lines, smaller loan haircuts due to their bank perceiving a reduction in tail risk, or just peace of mind).
I’m open to seeing if there’s further interest in this option (and the market is 1.5/2.5 5×5 today) or others. As noted before I am in touch with other parties with potential interest in buying puts on LAX and MIA indices. Recall that while LAX (and CHI, CUS and NYM) are electronically listed, options on the other 7 Case Shiller regions with futures (i.e. BOS, DEN, LAV, MIA, SDG, SFR and WDC) would have to be traded ex-pit and for a minimum of 20 lots.
My sense is that put prices look relatively attractive versus the >$10 billion credit risk transfer (CRT) notes that both FNMA and Freddie Mac have issued over the last years as 1) the term is so much shorter, and 2) CRT bonds are exposed to tail risk, while for a put to go “in the money” the entire index has to drop a meaningful amount.
Feel free to contact me (email@example.com) about this blog, or any other aspect of hedging home prices.