Mid-month option update

There’s have been 7 options trades this month (to go with 10 from August).

Here’s a table of my suggested offering labels.  (Note table was updated for current spot values on Sept 21).  Again, given the huge number of potential contracts (combining strikes, expirations, puts and calls) I’m only going to be posting a few live prices (mostly in the HCI-10 city index contracts).  Also, note that while I’ve generated quotes via a model for this table, actual prices might vary.

Finally, note that these quotes are for relatively short-term, slightly out-of-the-money strikes.  Other expirations and strikes are possible (as well as calls.)

Feel free to contact me (johnhdolan@homepricefutures.com) if you have a question or trading axe.

Thanks,  John


LAV -Last contract without OI

It seems incongruous that the only CME Case Shiller home price index contract that doesn’t have any OI (open interest) is LAV (Las Vegas).  After all LAV is the mecca for placing bets on many events, yet there’s been no “action” on LAV.  One might expect future LAV prices to be debated as: the NFL is moving there, the economy probably has a high beta to changes in the economy,  home prices remain so far below the levels seen at the peak, and environmentalists fret about longer-term water supplies.

The graph below shows forward levels that are consistent with rising (but slowing) HPA.  LAV contract prices have risen since Dec ’15 (orange diamonds) and Dec ’16 (green squares).  I’ve sharpened my pencil to tighten bid/ask spreads (with a focus on X17, X18) to see whether that might prompt a trade.

I’d note that implied YOY % price gains of LAV forward prices are a tad stronger than the CUS 10-city index contract.  For example LAVX18 is quoted 170.2/172.2 or 4.8/6.1% above spot levels while the CUS contract is 222.4/224.2 or 4.0/4.8% above spot.  There is an intercity spread market for CUS/LAVX18 that might be worth exploring, if someone would like to make a relative value statement.  I’m also open to hearing any thoughts on calendar spreads (e.g. X18 vs. longer dated contracts) if someone would like to debate the pace of HPA in future years.

Since OI=0, I don’t have any ax in LAV, other than to present a list of contracts where every region has OI.  I could use your help on LAV.

Feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions about this blog or any other aspect of hedging home prices.






Using DEN G18 puts to illustrate options

I recently did a trade in DEN.G18.P2000 (that is, puts on the Feb ’18 DEN contract with a strike of 200.  Here’s a graph that shows the P&L of the trade, were one to sell (write) those options at a price of 4.0.

I think that this is a useful exercise to review as while there may be many more natural hedgers (i.e. buyers of puts), this market would benefit from better two-way flow.  As such, I’m illustrating a way that a put writer might look at this trade with the hope of building some put-writing interest.

To recap, the DENG18 market this morning is 201.0-203.8, so the mid-market is 202.4 (as noted in the blue horizontal line).   The numbers along the primary horizontal axis are the index values at settlement.  The brown line shows that, if one wrote puts at 4.0, and if the settlement in Feb ’18 was higher than 200.0, there would be a profit of 4.0 points (ignoring as fees your broker might charge), but that profit would decline 1:1 for every point below 200.

The second horizontal axis (on top) lays out what each of the individual prices on the primary horizontal axis would translate into on a percentage changes versus the Case Shiller DEN index released in Aug 2016.  (I’m using the most recent Aug 2016 value, which may have been updated from the one originally released in Aug 20016).  Note also that I’m using YOY differences to reduce seasonality issues.

While the most recent YOY gain in the DEN index was ~7.6%, that gain, and HPA for all indices has been falling, and, futures market prices across many contracts are consistent with even further declines.

While a put buyer may have many reasons for buying a put (e.g. hedging real estate development, or a property that they are looking to flip, or to give their lender comfort that tail risks have been addressed, or a more bearish outlook) a put writer needs to form their own opinion of the risk-reward of this pay-off, and how such a new position might fit into their own outlook, all in the context of whether they expect to trade the position or hold until expiration.  (Note that this graph only shows price ranges of ~189 to ~208.  The risks increase should prices fall below 189, but the reward doesn’t increase above 208. Note also that this put is relatively short.)

I’m currently open to buying 5 lots at a price of 4.0 (or sell 5 lots at 5.0) should anyone want to sell.

Recall that while some CME option contracts can be electronically quoted and traded (e.g. all the CUS, CHI, LAX and NYM options), trades in some other regions first need to be agreed to off-exchange and then cleared on the CME.  That is, if someone wanted to trade a MIA option, the two sides would need to arrange the trade.  (That’s where I can help any party looking to take an exposure in another option, whether put or call).   However, since there any already been a trade in this particular region, strike and expiration, the DEN.G18.P2000 contract can be traded electronically. (There may be few futures brokers that will accommodate such a trade.  Please contact me if you need the name of one that will.)

Please feel free to contact me on this trade (johnhdolan@homepricefutures.com), or any other aspect of hedging home prices.

Thanks,  John


Recap of Summer 2017 activity posted

I’ve just posted a recap of CME activity in the Case Shiller futures and option for July and August.  You can find in the Reports section of link here.

This is a short review of a much longer time period as I spent much of August on vacation, to include hiking (Switzerland) often away from WiFi.  I cleared my head, and now I’d like to focus on these contracts -and other forms of hedging home prices.

This recap is shorter than most, but still includes pages covering quotes, market moves, and activity.  I’ll amend with missing pages over time as I blog about key points (e.g. options).

The summary highlights of the recap include:

–There were trade in 6 futures contracts in July, 18 in August,  and 10 option contracts.

–OI slipped to 45 as 16 Aug ’17 contracts expired. OI remains very front-loaded (1.26 years, average-to-expiration) and remains concentrated in the November expiration cycle (87%).

–Bids and offers were generally lower but rose in SDG and SFR.

–Bid/ask spreads (on contracts that had two-sided markets on both June 30 and Sept 5) were about unchanged, but with mixed results across regions and expirations.

– Two-sided quotes are now available in Nov ’19.

Feel free to contact me (johnhdolan@homepricefutures.com) if you have any trade ideas, or axes.



CME Reaction to July release of Case Shiller #’s

Quotes on the CME home price index futures were generally lower this morning (relative to last Friday) after the monthly release of the Case Shiller indices.  The table below shows bids, offers and mid-market levels for the 11 Nov ’17 contracts.  The mid-market values for the BOS, NYM and SFR contracts were all lower by more than one point by the close.  (This despite the large upward revision to last month’s NYM index.)   The CHI and LAV contract were the only two mid-market values that were higher after the news.

The only trade today was two lots in the SFRX17 at 241.4.  Note that 1) that there was an offer to sell more through the close, and 2) that the offer (and trade price) was lower than the bid on Friday.

Activity has been quiet during July with only a total of four trades.  Bid/ask spreads are <= 2.0 on all Aug ’17 contracts.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions or trade ideas.

Thanks,  John

Home Prices vs. Stocks – a good source of diversification?

Inquiries from traders looking to hedge (sell) housing futures (or buy puts) continue to dominate.  As such, I’m (unabashedly) putting forth an idea to try and bring in some interest from the long side (on forward contracts).

First, the graph below shows the closing prices on the Nov ’17 contracts for the S&P 500 contracts vs. the CUS 10-city index.  As such, this is a comparison of futures vs. futures for the same expiration.

As I note in the titles for the vertical axes, the S&P contract is up 19.7% over the last two years, while the CME CUS-10 city futures contract is up only 1.7%.

As you’d expect from eye-balling the graph, there is a low correlation between the two markets.  If I use daily changes, the correlation is ~25%, but if I use discrete 20 business day changes, the correlation drops to about ~10%.  Net, one would have been quite diversified.

Second, if one looks back further, the SPX cash index is up over 80% over the last five years.

Finally, (in highlighting where I need to cultivate interest on the long side) the forward CUS contracts (e.g. those that expire in Nov 2018-2020) have mid-market values that are only 3.2%, 5.2% and 6.8% above the mid-market of the Nov ’17 contract.  My sense from public pension consultants is that the “experts” are projecting 5-6% gains per year on the stock market.

Taken together, home price contracts: a) have lagged gains in stocks, b) seemed to be priced for low gains going forward, and c) have demonstrated low correlation to stocks.  Net, for anyone thinking that stocks may have risen too far, or for too long without an interruption, housing contracts may be worth exploring.  (Note that the CUS-10 index has a higher weight to more urbanized areas.)

Now, an alternative view is that corporate America (as reflected by stock prices) has out-performed, and will continue to out-perform home prices.  Clearly if robots replace all workers, or if all jobs are shifted overseas, there’ll be few people to buy homes.  In addition if overseas profits are repatriated, or corporate tax rates cut, cash flow to companies should improve.   Those fears (and the prices of homes vs. stocks) highlight the 99:1 divide in society (a topic for a separate blog).

However, while those themes may be in vogue, there’s always a danger that they are more-than-priced-in to current stock values.  Taking outright home price exposure, or writing puts on home price options “may” be a way to take an uncorrelated counter-view on today’s market sentiment.

My sense is that the CME housing contracts represent one of the best public  “pure plays” on home prices.  By contrast, bank stocks have other risk, and builder stocks are impacted by input costs (e.g. tariffs on Canadian lumber), labor costs, and local zoning.

Feel free to contact me (johnhdolan@homepricefutures.com) if you’d like to discuss these themes.  While volume has been extremely low in the housing contracts, my sense is that a programmatic long might be able to accumulate open interest at attractive levels.



Recap of June CME activity posted

I posted a recap of activity in the CME Case Shiller home price futures contracts for June.    You can access in the Reports section or via this link.

The 28-page report contains numerous tables and graphs of relevant information, including a section with graphs, prices and put option quotes by region.  For example this table shows price changes (aggregated across expirations) by region, and the change in spreads (positive is tighter) by region, for contracts with two-sided markets in both May and June.

Highlights from the recap include:

–There were (at least) 13 futures contracts traded in June across 3 regions and 3 expirations on 5 dates.   (I’m missing details on one trade)

–OI grew to 51 (from 48). OI remains very front-loaded (1.20 years, average-to-expiration) and remains concentrated in the November expiration cycle (69%).

–Bids and offers generally fell across most regions and expirations.  Offers dropped on Aug ’17 contracts after the June release of CS #’s suggested that Aug contracts had been priced too optimistically.  Lower front contract prices tended to translate into even bigger drops on longer-dated contracts, thereby lowering implied HPA.

– Bid/ask spreads (on contracts that had two-sided markets in both April and May month-end) tightened slightly.

–There are two-sided bids in all contracts out to Nov ’18, but then primarily just bids (as changes in those levels drive closing prices).

–There were no options trades (but a spreadsheet of put option quotes across all regions, and for a variety of strikes,  for X17-X18 contracts was posted in a separate blog

Feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions or trade ideas.



Suggested Offering Levels for Puts

I’ve updated my table (see below) of suggested offering levels for CME Case Shiller puts.  Note that I’ve eliminated puts for Aug ’17 expiration as there’s too little time and volatility to justify prices other than intrinsic value.  Furthermore, some quotes show up as “1.0” in red, as the theoretical value I calculate is below 1.0, but I don’t care to write such tail risk.

Put levels are generally slightly lower than May 31st values as a month has passed, and the referenced futures contracts are flat to higher on the month.  As such, the DENQ18 (the contract with the largest price drop) is 0.8 points lower than last month.

Recall that the CUS, CHI, LAX and NYM can be exchange-traded, but that trading in the other contracts (at least using my broker) needs to be arranged off-market, and then brought to the CME to clear.  While more involved, there is no minimum size limit to the number of contracts that can be traded (as opposed to 20-lot minimum for such off-exchange trades done before Feb 2017).

Feel free to contact me (johnhdolan@homepricefutures.com) if you have a trade, or a trade idea, that you’d like to discuss.

Quotes during pre-/post-market hours, best times for trading focus (day/month)

I’ve noticed a few quotes appearing in the CME futures before the market opens in the morning, and wanted to remind traders how quotes are displayed.  Recall that trading opens at 9:15 (Eastern).  Until then, the only quotes that show overnight are outright orders.   The effect of calendar spreads, and inter-city spreads, both of which drive many of my quotes, only being to show up when the market opens.  So, for example, a wave of 100+ quotes appeared today at 9:15, to supplement the 20-30 outright quotes that had been showing earlier.  (BTW -Trades, particularly important in options, can be arranged off-exchange at any time.)

Market participants are welcomed (encouraged!) to enter quotes at whatever levels they want, but if you’re looking to see whether your quote is highest bid, or lowest offer, it might make sense to wait until after 9:15.

Having said that, I also think that while traders can leave orders all day (GTD) or open-ended (GTC) that until the market gets to the their level, if they’re looking for a reaction in the market, I’ve found the best times are the first and last hour of the trading day.  (BTW – I strongly discourage market orders for more than one contract as the execution level may end up being well through the first price.  Please feel free to call me with interest of greater than the contracts bid (or offered) and I will try to accommodate retail-sized inquiries.)

With such low volume traded here, traders tend to focus on other things between 10 and 3:30.  I’ve not done a study, but as counterparty to the majority of trades, my sense is that more trading takes place in the first and last hour, than the other 5+ hours of the trading day.

Finally, I’d note that traders tend to give attention to these contracts when key housing-related news is announced.  I’ve written before about how in past years >40% of the trading in a month took place in the window from 2 business days before to 2 days after the release of the Case Shiller indices.  Other key events (e.g. unemployment, 25 point moves in the S&P, rate hikes by the Fed) also seem to bring eyeballs to this market.

Feel free to post quotes at any time, at any level, but if you’re looking to execute more quickly, or on more than the lots bid/offered, please consider reaching out to me first (johnhdolan@homepricefutures.com).



CME Market moves post-June release of CS #’s

Quotes on the CME Case Shiller futures contracts generally slipped lower after Case Shiller #’s were released Tuesday morning.  The one-day changes(mid-market) may be the best indicator of changes as they incorporates lower offers and lower bids, even if closes don’t change.  (Note that I’m highlighting the Nov ’17 contract here.  Other expirations would likely show similar results. ) As highlighted in red, the CUS and CHI contracts fell the most, with CHI falling more than two points.  LAV was the only contract quoted higher.  (As of 3 PM there was only one trade in HCIQ17, bringing the total trades in June to 12.)

My sense is that the gain in index levels versus one year ago (shown here labeled as “last month’s HPA” for  the May ’17 release vs. May ’16 release, and “this month’s HPA”, shown as the June ’17 release vs. the June ’16 release) were slightly lower in 9 of the 11 contracts.  The two regions that saw a slight uptick in HPA (LAV and SDG) saw the smallest price losses. (Note that I’m using the revised versions of past index levels.  Certain indices -most notably CHI -have been experiencing frequent downward revisions, so that measured gains might be revised lower).

This slide in HPA might be explained by very strong June ’16 vs. May ’16 index values, OR, the sentiment about the importance of low inventory levels is losing steam.  On the second comment, I’d note that the last 4-5 trades this month have all been “bid hit”.  One would have to go back many weeks to find a similar pattern where traders were hitting bids. Perhaps the market got ahead of fundamental value.

Having said that, I’d note that the mid-market prices in the Aug’17 contract (that is, in comparison to the Aug’16 index release) are consistent with YOY price gains expanding from the most recent HPA.   The BOS, CHI, NYM, SFR and WDC contracts are all priced (at mid-market) for YOY index gains of ~1% higher than this month’s (June 17′ vs June ’16 gains).   So, either index HPA, might revert higher next month (as inventory headlines play out), or several of the Aug ’17 contracts are quoted too high (or is it something else?).

Let me know what you you think (at johnhdolan@homepricefutures.com).