AMZN/HQ2 possible impact on DC home prices- Using the buzz for a primer on call options

The DC press has been all abuzz about the prospects of Amazon picking the DC/ Northern Virginia area as the site of their HQ2 and the potential impact on home prices in the region.  However, speculation on how to play the real estate market in the run-up to the anticipated year-end announcement has not resulted in many tradeable strategies (other than JBG Smith Properties REIT -JBGS).  If one has a view that DC home prices might pop, Case Shiller WDC home price call options, that can be traded on the CME (Chicago Mercantile Exchange), might be an ideal strategy.  As such, let me use the AMZN buzz as an opportunity to discuss call options. Note that while my comments here relate to the Case Shiller WDC index, calls (and puts) can be traded on the CME for nine other regions, and I’d be open to structuring options on any other home price index).

For those new to futures and options, WDC is one of ten set of regional contracts listed on the CME.  Each region has expirations that will settle on the value of the respective Case Shiller index at the end of the expiration month.  Contract expirations range from Nov 2018 to Nov 2022 (but I’ve only listed the first eight here).   Options (both puts and calls) can be quoted on any of the expirations, for any strike.

Contracts have notional values of $250 * price (i.e. each point =$250), so a contract priced at 230 has notional value of $57,500.

The table below has offering levels for nine contracts (three strikes for each of three expirations).  As with most options, the longer the time to expiration, and/or the lower the strike (relative to futures contract value), the higher the premium.

The graph below shows the payoff of two options (the Nov ’19 235 and 240 strikes) at expiration, and illustrates that for index values less than the strike, the call buyer doesn’t receive anything, but then participates 1:1 with gains in the index.  (Options and futures prices can vary between inception and expiration for any number of reasons.  A benefit of options is that regardless of any price moves, the option buyer cannot lose more than their initial premium.

A few notes:

  • There has been no volume in WDC futures and options for many months, but I’m trying rejuvenate interest and as such, am happy to answer any questions, and/or facilitate trading inquires.
  • Calls on other strikes and expirations are possible.  Contact me if you’d like a quote.
  • While I’ve shown suggested offering levels, I’d also be happy to buy calls.
  • My focus here has been on calls, to address interested parties that may want to put up some money for the option of a particular event.  Futures could also be used to express a bullish view (and I’d be happy to accomodate any inquiries) but a futures buyer runs the risk that prices may drop, requiring more money to be posted.
  • To reiterate my comment from above, my observations here related to the Case Shiller WDC index.  I’d be open to structuring an OTC option trade on other home price indices.
  • There are not many futures brokers who trade Case Shiller options.  Please contact me for names if your broker does not.
  • WDC contract covers a broad geographic area (see page 8 in CS Methodology in Reports section for listed counties).

As always, feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions or would like to discuss any trading strategies.

Thanks,  John

(BTW -See Core Logic’s report on Amazon HQ2)

 

 

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