Basics: Approaching Aug expiration -review of theory

With the August 2016 contract expiring next week (trading stops 3 PM New York on Monday, valuation as of Tues Case Shiller #’s 9:15) it may be useful to recap the (quarterly) expiration process.

The table below has the Case Shiller index history for 3 months  (June, July, and August release) for 2015 as well as the last two months (June and July) for 2016.  Quotes (bids, offers and mids) for the Aug 2016 contract prices are shown in the blue area.  (Note that bid/ask spreads average just under 1.0 point across the 11 contracts, which is typical of this phase of the expiration cycle.) Finally, mid-market quotes are compared to last month’s release and the Aug 2015 release for MOM (month-on-month) and YOY (year-on-year) percentage changes.

Aug 16 Tminus 3

I use mid-market levels to illustrate percentage gains as, in theory, if traders “know” (or believe in their research) what the CS #’s will be on Tuesday morning, they can bid below that level, or offer above that level.  As such, since each point that one can buy below the index or sell above is worth $250/point, it has been argued that the bid/ask range should be consistent with some range around the expected Case Shiller release (as traders attempt to capture differences between what they “expect” each index will be, and their bid or offer).  If so, the market quotes might be useful for those drafting next week’s press releases as it appears that market quotes are consistent with DEN, MIA, SDG and SFR all posting >7.0% gains for the last 12 months, while NYM and WDC will continue to be the laggards.  ( I’ll leave it to other to explain why that might make sense).

Of course this theory would work better if the markets were deeper.  Most quotes are only 1×1 (one lot bid for and one lot offered) and many of the quotes are mine.

The “accuracy” of the expiring contract has wavered from months where all 11 index values were inside the bid/ask spread on the last day of trading to last quarter where there were multiple outliers (some of which were > 1 point).

I’m happy to facilitate anyone’s efforts to express a view on the next week’s index levels.  Please feel free to contact me (johnhdolan@homepricefutures.com) if you like to propose a trade.

Finally, I’d note that with the expiration of the Aug ’16 contract the CME will open a Feb ’18 expiration.  Since that contract expires on the value of the CS index released in February 2018 (the Dec 2017 index), I hope to propose a list of Feb ’17/Feb ’18 calendar spreads for those that want to debate HPA gains (?) for 2017.