UBS Outlook -Using Calls, Intercity spreads to express views

UBS just updated their outlook of home price values in major cities around the world.  (You can link here.)  A major first impression is that while some publications question whether US prices are bubbling, the recent gains in home price indices in other countries (and they highlight Toronto and Stockholm) make US markets look asleep by comparison.    I’ve had inquiries from people looking to hedge Toronto, Vancouver and other cities listed in the UBS report.  No surprise, given the recent strength, we ended up far apart on what forward values might be.  Neverthess, I remain open to facilitating an OTC trade.

A secondary observation from the report is the relative strength (and fundamental value) of US cities to each other.   For example, the only “undervalued” city (of the 20 listed) is Chicago, while San Francisco, Los Angeles are “overvalued’ and the cost of housing in New York City (using a different metric), consumes more of a borrower’s income than even those two cities.  (BTW -Boston is also covered, and is shown as “fair-valued”).

Here, the CME contracts may be helpful, should one want to express an opinion, as there are contracts in for each of the five regions (BOS, CHI, LAX, NYM and SFR).  However, be cautious as the Case Shiller indices may not geographically overlap with one’s impressions of inner city markets.  UBS references the local FHFA indices, which are much more narrowly defined than the Case Shiller indices.  Still, it may be fun, or useful to review CME markets in the context of the UBS comments.

The chart below shows the quotes on 11 Nov ’20 CME contracts converted into percentages versus spot levels.  The bottom of the bar represents the bid side, the top the offer, and the hash mark, the mid-market value.  While there may be some challenges in this approach (due to seasonality issues) I would expect that the impact is smaller, the closer one is to the November in the calendar, and the longer the time to expiration).

The chart illustrates that CME market prices are consistent with the most bullish sentiment being with the DEN and LAV contracts (using mid-market levels).   The “overpriced” LAX and SFR contracts cited in the UBS report have greater gains priced into Nov ’20 expirations that NYM and CHI (but only by a hair).  BOS is priced for gains relative to its neighbors in NYM, WDC and even the 10-city index.  So (with the exception of BOS) the contracts seem to be priced along the lines of “what’s rich, will get richer”.

One can trade these contracts outright, but if instead, one wants to express a view on relative values, inter-city spreads are available to trade.

The table to the right is intended to show that two-sided markets exist for all ten combinations of each region versus the 10-city index contract for the Nov’ 20 expiration.  Each quote shows the difference in price points between simultaneously (in the case of the bid side) buying the HCI contract versus selling a regional one.  (BTW- It’s also possible to trade region vs. region, e.g. BOS v NYM or SDG v SFR, but I’ve not shown those here.)

I’ve converted price differences into gains versus spot (the gain on HCI contract vs. HCI spot,  minus the gain on regional contract versus that region’s spot).  The HCI/DEN IC spread is quoted 49 bid (where the bidder would be buying the HCIX20 contract at a 4.9% lower gain in HPA than the DENX20 contract is priced.  On the offered side, the seller is looking to sell the HCIX20 contract with 0.4% lower gain than the DENX20 contract.  Both sides are priced with DEN outperforming HCI.  The market debate is by how much.

Note that in doing IC trades, the parties are bidding/selling contracts with different notional value.   One might consider buying (or selling) more of the smaller (or larger) contract to convert positions into even notional values.   Again, I’d be happy to facilitate.

Finally, while there’s been some trading in puts, buying or selling calls might be another way that a trader might express a view on where they think forward prices are headed.

The table below shows suggested levels on call option contracts for the Nov ’20 expiration on the five of the cities mentioned above (plus the 10-city index contract).  I’ve selected strikes that are about 7% over spot levels as that will make calls close to “at-the-money” relative to futures prices.  I’ve also converted option bids and offers into “% vs. strike” so that premiums can be compared by contract.  One can see that, given all strikes are about 7% over spot levels, and close to that of futures, that I’m implying lower volatilities on some contracts (e.g. BOS, NYM) and higher “vols” on others (most notably SFR).

So, if anyone also believes that SFR is over-valued, one might consider writing calls as SFR has both highest forward prices and highest implied volatility.






Finally, while one can enter electronic orders on the HCI, CHI, LAX and NYM contracts, I’ve highlighted the BOS and SFR contracts as, to my understanding, prices must first be negotiated offline, before trades can be cleared on the CME.  Again, I’m happy to facilitate trades in any of these six contracts, or using other strikes/expirations.

So,  there’s a lot in the UBS report to chew on; their report begs for a platform for trading home price derivatives on values around the world; and there are three different ways to approach trading US values on the CME.

Please feel free to contact me ( if you’d like to discuss any of the points raised here, or if you have a trade in mind.








Sept CME Case Shiller Futures/Options update -27 trades

I just posted a recap of activity during September in the CME Case Shiller home price futures (and options) contracts.    You can find the recap in the Reports section or link here.  The recap cover 27 pages and includes an updated section where information unique to each regional contract (e.g. graphs, prices, volume, open interest, implied HPA and suggested put offering levels) are presented on a separate page for each region.  (See example below).


The highlights of the report include:

–There were 20 futures contracts traded in Sept across 5 regions and 6 expirations on 7 dates.

–Bids and offers generally rose across most regions and expirations (except MIA), particularly after Sept 26 CS #’s.

–Bid/ask spreads tightened dramatically, particularly in longer contracts. However, spreads remain wider-than-normal in front contract (~2pts).

–There were bids in all 121 contracts, and  two-sided quotes in all contracts out to Nov ’18, and then X19 and X20.

–OI remained flat at 45 as several trades appeared to be unwinds.

–For example, close out of SFRX20 open interest led to wtd. avg.  of OI to drop from 1.20 years to 0.92.

–OI remains very concentrated in November expirations (82%).

–There were 7 option trades, again in DENG18.P2000.

Please feel free to review and share (via sending links) the recap.  Feel free to contact me ( to discuss the themes addressed in this report.


Thanks,  John




CME Futures -post Sept release of Case Shiller #’s

Quotes on the CME  Case Shiller home price index futures are marginally higher this afternoon (relative to yesterday, and as measured by mid-market values) after this morning’s release of the Case Shiller indices.  The biggest gain took place in the LAXX18 contract (where there was one trade today).  DENX18 is the only contract that is lower.

Across all contracts, bid/ask spreads average about unchanged.  Bid/ask spreads in the front X17 contract now average 1.9 points.   The CUS (10-city contract) has the tightest spreads.  The SDG/SFR pair has the widest.

Year-on-year price gains in the indices (so ~HPA) were highest in BOS, LAX and SFR (not shown here).  HPA gains slowed slightly DEN.

The largest monthly revision was a downward revision of 0.24 to last month’s LAX index (making today’s increase in HPA more impressive).

Month-to-date volume is 27 contracts with 7 in options and 20 in futures.  There have been trades in 5 regions, and 5 expirations.

Please feel free to contact me ( if you have any questions or trading ideas.

Thanks,  John



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 ( 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 ( 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 (, 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 ( 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 ( 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 ( 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 ( if you have any questions or trade ideas.