The Nov 2018 (X18) contracts will stop trading on Monday Nov. 26th at 3 PM EST (note – one hour before other contracts) after a 5-year run. There is open interest of 18 contracts across 7 regions, so some traders may want to close out positions, or extend hedges, before cash-settlement on the Case Shiller index values released on Tuesday Nov. 27.
To recap past blogs, since the contracts reference activity during the months of July, August and September, and since the contracts cash-settle, at this point, trading in the contracts should be mostly based on traders’ projections of the index values to be released on Tuesday (as the index references events that have already taken place). Thus, in theory, bids and offers should bracket market expectations.
The table below shows: historical index values for the 11 regions, Friday’s bids and offers on the 11 CME X18 contracts, historical prices converted into year-on-year (“YOY”) differences, and the YOY difference between Nov ’18 bid and ask, versus the index values from Nov ’17.
Bid/ask spreads tend to be < 1 point (except LAV and SFR which have been more volatile). Also note, that Mid/ last year YOY projected differences are generally lower than that of the last few months, consistent with many projections of declining HPA (home price appreciation).
Despite the efforts of many home price analysts trying to replicate the Case Shiller methodology, actual index values tend to fall outside the bid/ask range on the expiring contracts, even up through the last day of trading. I label these events “surprises” and will highlight all after Tuesday’s numbers.
Beyond the 11 CME exchange-traded regional contracts, I’m trying to develop interest in derivative trading in other home price indices. Here are my “markets” on the ten more regions, that along with the ten above, make up the Case Shiller 20-city index. Note that I’ve labeled these at OTC (over-the-counter) as trades would need to be negotiated privately. While the CME contracts trade with contracts worth $250/point, I’m open to “trading” these second ten regions at $100/point notional values.
Feel free to contact me (firstname.lastname@example.org) if you have any questions on this blog, or any aspect of hedging home price indices.