The CME Case Shiller home price index futures expire four times per year (Feb, May, Aug and Nov) settling on the index values released on the last Tuesday in month of expiration (so Nov. 28 this month). While longer-dated futures prices can be influenced by many things (e.g. order imbalance, desire to hedge, relative value to other markets) as expiration approaches, many argue that contract quotes should converge toward traders’ expectations of the indices to be released. The graph to the right illustrates the convergence that has been playing out in the Nov ’16 contract.
As the Nov ’16 contracts expire next week (last day of trading is Mon. Nov 27), we can look to CME quotes to infer what traders might be expecting from next Tuesday’s Case Shiller numbers (upon which any open positions are settled). Recall that the data used in the November Case Shiller release is compiled from July, August and September, so there is no “new news” over the last few weeks, that should influence Nov ’16 contract prices. As such, if a research firm determines that an index will be released on Tuesday with a value of 200, that firm might be willing to bid for contracts at 199 and offer contracts at 201, as every point difference is worth $250 per contract. This process of faith in one’s forecasts, should drive contract prices to convert to Tuesday’s numbers.
The chart below highlights the recent history of the Case Shiller CUS-10-city index and each of the ten regional components. Below that are recent quotes from the Nov ’16 contracts. Since those contracts settle on Tuesday’s numbers, the quotes should bracket expectations.
Note that for each contract there are bids, offers and mid-market value is calculated. Bid/ask spreads are all inside 0.6 points, which is slightly tighter than “normal” around contract expirations.
At the bottom of the chart are 1-month, 3-month and year-on-year percentage differences ASSUMING that the mid-market levels match next Tuesday’s numbers.
As such, you can imagine next week’s headlines (e.g. “Home Prices up 4% on the year”, “Denver leads housing markets”, and/or “New York market continues to lag”).
I’d note that the 2-3 trading days before Case Shiller numbers often brings a slight uptick in interest (others weighing in with quotes) and trading. After all, Trader A might have a different expectation than Trader B of next week’s CS numbers and their difference in quotes will likely have nothing to do with other markets or home prices next week.
So, I’d encourage all to review the Nov ’16 quotes and to evaluate them against your own expectations. While bid/ask spreads are relatively tight, there have often been cases where the actual Case Shiller numbers fall outside these ranges (what I label a “surprise” to the CME markets). Stay tuned to see how many surprises there are next week.
As always, if you’d like to discuss this blog or any aspect of hedging home prices feel free to contact me (firstname.lastname@example.org).