Chicago: 3 ways of expressing a view to lever trades in CHIX13

There have been three trades for 8 lots over the last few days in CHIX13 (Nov 2013) CME Case Shiller futures.  Since that’s where the action has been, and since the CHI series has the largest open interest of any region,  let me review three different approaches to trading that contract.

  1. Outright view
  2. Relative performance versus the rest of the CUS 10-city index)
  3. Versus forward CHI contracts

The CHIX13 trades have ranged from 130.0 to 130.4.  These prices represent premiums to the CHI spot index of ~3.4 to 3.7%.  As the November Case Shiller index release will reference the 3-month period July-September, it could be argued that trading in this contract represents differences of how to measure/estimate what has already taken place in Chicago home prices.  The November release tends to benefit from some positive seasonal factors (which changes over the years) so the question surrounding market levels is how much more than seasonal factors are at work.  Outright orders are the way to play this debate.

If one wants to somewhat reduce seasonal factors in trading the CHI contract, the CUS/CHI intercity spread might be worth reviewing.  A recent quote shows a 50.8/51.6 bid/ask quote for the CUS_CHIX13 intercity spread.  While there may be different ways of interpreting intercity spreads, a 51.0 bid would be the equivalent of buying the CUSx13 contract at 181.2 while selling the CHIX13 contract at 130.2.  At 181.2 the CUS contract is 2.65% above the spot value, while at 130.2 the CHIX13 quote would be 3.6% above spot values.  Thus, an intercity spread value of 51.0 might be consistent with bullishness in CHIX13 relative to CUSX13.

Finally, the question of whether the price increases in the CHIX13 contract will carry over into the future can be addressed in calendar spreads.  To (somewhat) reduce the impact of seasonal factors one can look at the CHIX13_X14 calendar spread market.  A recent quote of -7.6/-5.2 is consistent with expectations of higher CHI index values one year forward.  (Recall that prices are quoted front contract minus back contract).  For illustration, a trade at -6.0 might be settled at 130 for Nov ’13 and 136 for Nov ’14.  The 6.0 premium for Nov ’14 over Nov ’13 is a 4.62% difference.  One might consider the CHIX13_X14 calendar spread market if they have strong views on not whether index values will be higher in Nov ’14, but how much higher they will be.

So, there are at least three different ways to express a view of, or to leverage recent activity in, the CHIX13 contract.

As an aside, it has been my observation that (while these markets are open for 7+ hours) most trading tends to occur in the first hour, the last 15 minutes, or around lunch, so peek in then to see if someone is willing to take the other side of your trade.

As always, if you have a question, or some point that you’d like to see debated, please feel free to contact me (