Principal Protected Puts

How would you like to buy a product where: a) you participate if home price indices fall below current levels, and b) you’re guaranteed to get all your upfront money back if they don’t?

A number of factors have changed to (financially) allow the creation of a principal protected put (“PPP”).  The combination of higher short-term rates, the continued relatively steep HPA curve out through 2019, and relatively low volatility in the CME Case Shiller home price index futures, should allow a user (or a structured products desk) to combine a Treasury zero with a CME put (struck at near today’s spot level).

The table below has the necessary information for such analysis.  Note that I’ve used a strike of 225 for the HCI (10-city index) contracts.  In theory, any strike on any region is possible, but a) volatility should be higher on regional contracts, and therefore puts will cost most, and b) higher strikes (above spot) will be reflect higher put premiums.  That said, I’d be happy to engage with anyone looking for levels on such PPP’s.

I’ll use the HCIX20 (Nov 2020) contract as an example.  Treasury zero yields for ~ 2 years are about 2.67% suggesting a 94.23 price.  (Please independently check all Treasury yield/price inputs.)  Puts for that futures contract with a strike of 225 are offered at 4.5 points, which is about 1.99% of the spot index.  Combining the 94.23 price and the 1.99 “price” on the CME options creates a total proceeds of 96.22 (shown in yellow).  (BTW -All numbers in “Put/Ask Price” column -in brown – are taken from offers I’ve posted on the CME.)

Note that these (yellow) combo prices decline as maturities extend as the price on the zero curve is dropping faster than the premium on the put.


The payoff on that PPP is shown on the top graph below.  In cases where the index ends about the 225 strike, the user gets all principal back (courtesy of the maturing zero coupon note.)  In cases where the index ends below 225, the PPP returns more proceeds.  Note that the PPP does not pay any interest (although “extra” proceeds at inception, i.e. 100-96.22 creation level) could be used to buy more zeros.  Also note that the HCIX20 contract closed at 241.0, so that the 225 strike is out-of-the-money today.

An alternative to getting even more “anti-fragility” into a product (borrowing from Bruce Stachenfeld’s review of the Taleb Anti-Fragility book in his recent blog) is to use the discount from 100 to buy even more puts.  The area of the table above solves (in green) for what multiple of puts one could buy in combination with a zero note, while limiting proceeds at 99.0 (in case prices move, or there are expenses).

Since the required proceeds decline in the un-leveraged state (in yellow), one can increase the multiple as maturities extend.  For example, staying with the HCIX20 contract one might combine 2.4 puts (w/ 225 strike) with one zero coupon.  The price of the two components would be 99, and under situations where the HCI index is under 225 at expiration, the total proceeds would be even higher (as shown in the second graph below).

I’d like to work with any interested readers where I can help – on offering (or buying) puts (or calls).   There has been near no volume in options contracts over recent years, but with the noise around home prices, or HPA, peaking, this seems a good time to rejuvenate the sector.  I’ve seen many forms of principal protected notes in my career and understand the merit of offering a bundled package to investors.  That said, I’m happy to engaging with readers about just the put side, or any aspect of options on home price indices.

Please feel free to contact me ( if you have any questions about this blog or any aspect of hedging home price indices.

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