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.