After multiple inquiries, I thought that I’d pull together my responses of FAQs related to “how do I trade CME housing futures” into one blog (that I will update over time). If anyone has ideas that would improve this list, please feel free to contact me (email@example.com).
Understanding Reference Obligations:
- To trade any future it’s important to know how the reference obligations (in this case the Case Shiller indices) are calculated. There is a write-up of how the Case Shiller indices are calculated in Reports section, or you can access here.
- There are many different home price indices that perform differently due to either geographic coverage (broader vs. more narrowly defined), inclusion in index (e.g. repeat-sales vs new sales, those with FHFA conforming mortgages vs all homes), seasonally adjusted (or not), and/or calculation method (e.g. repeat-sales vs. hedonic). Note that the CME contracts reference the Case Shiller NSA (non-seasonally adjusted) indices which are based on a repeat-sales methodology with geographically wide coverage areas.
- Trades referencing other indices can be done but in OTC (over-the-counter) contracts.
Format of Futures Contract: There is “An Introduction to Case Shiller Futures” in the Reports section( or you can access here) that should help explain the structure of the contracts. Some key highlights include:
- There are 11 regions (one for the Case Shiller 10-city index, and one for each of the ten components),
- Each region has 11 expirations.
- Each point is worth $250 so the notional value of a contract priced at 200 is $50,000.
- Contracts expire on quarterly cycles of G (Feb), K (May), Q (Aug), and X (Nov) months.
- Contracts settle on the index value released in the settlement month (the last Tuesday).
- The CME establishes minimum margins (both upfront and maintenance) that your broker might make larger. That said, my sense is that margins have been running <5% of the notional value of a contract.
- Each brokerage firm has their own fees for trades and other services (e.g. wiring funds).
- Best to allow some time before first trade to open account.
- You need an account at a futures broker that allows their clients to trade the Case Shiller home price index contracts.
- Their role will be to screen for suitability, and KYC issues. (I’m not aware of any licenses required by users to trade).
- Any trade you execute will have the CME as counterparty (so I’m not your counterparty on CME trades).
- I’m aware of two firms – Interactive Brokers and Insignia Futures -that allow trading in outright CS futures for individuals. IB is a good platform for those comfortable placing orders electronically. Insignia (contact Joe Fallico) is better if you need human involvement (but they also have an electronic platform).
- Insignia allows trading in a broader range of orders to include: inter-city and calendar spreads, as well as options.
- Please let me know of any other firms that will allow retail to trade these contracts and I will alert CME and post to my website.
- I try to make sure that there is at least 1×1 (one lot bid vs. one lot offered) across all contracts out to about the 7th expiration (today X20) via quotes from me or others.
- At present, many will be mine, but anyone can post a bid or offer. My sense is that the 1×1 market helps in “bracketing” bid/ask discussions, as well as creating graphs. On some contracts (typically the 10-city index, CHI, LAX, and SFR contracts) there have historically been quotes in longer-dated contracts.
Trading: Here’s a few ideas on how to approach placing futures orders:
- Since many markets today are quoted 1×1 I strongly advise not to place market orders for more than than the amount bid. This is currently a thinly traded market with often limited depth to the bids or offers.
- Please feel free to contact me if you’d like to discuss trading more than one lot. I may have interest at (or inside) posted levels for up to 10 lots. Several of the 5-20 lot futures/option trades that took place over the last few years (particularly in options) started this way.
- Note that my interest is as a trader. I am not offering guidance or financial advice. While the CME is the counterparty, I may be the person taking the opposite position of yours.
- I’m happy to network/market/blog/tweet any trading axes for larger orders. (Thin hub-and-spoke information model). Feel free to sign up for blogs on my website (www.homepricefutures.com), tweets (@HomePriceFuture), or send me emails (firstname.lastname@example.org). In the past, smaller trades (e.g. 5 lots) were useful for prompting discussion, and narrowing bid/ask spreads -key to bringing in traders who might be willing to trade larger sizes.
- My sense is that a disproportionate share of trading seems to take place in the first and last hour of trading days, particularly on days when information that might have more of a direct impact on home prices is released (most notably the two days before and after Case Shiller #s are released.)
- The minimum quote increment for futures is 0.2 (=$50), and for options is 0.1 ($25).
- Some vendors describe the 10-city contract using the symbol HCI. Some use CUS.
- Calendar spreads may be quoted differently (i.e. with signs reversed) on different platforms.
- Options (both puts and calls) can be traded on any region, for any 5-point strike, for any of the 11 expirations.
- Given the 1000+ option permutations, I tend to only post live quotes on 10-20 contracts. Those posts are concentrated in areas where I’ve seen the most interest, namely 9-18 month term puts where the strike is about equal to the spot index.
- The Case Shiller options are options on the futures contracts -not options on the index.
- Options are exercisable European-style (i.e. at settlement).
- I’m open to proposals on many types of option strategy trades.
- While there was a lot of option trading when the contracts were introduced in 2006, volume has collapsed. That said, I believe that options may be a very useful fit for retail clients as total exposure (for buyers) is known upfront.
I hope that this is enough to answer many “how to get started” inquiries. As noted above, please feel free to contact me if you have ideas: a) on how to improve this post, or b) any trading ideas.