There has been unusually high volume in the CHIX13 (Chicago Nov 2013) contract over the last few days. Today (Mon. Oct. 28)26 lots traded at 130.0, following another 10 trades over the last few days between 130.0-130.4. I imagine that traders involved have some expectation (and possibly disagree) as to what the Oct release of the CHI Case Shiller index will show. After all if we have the September release (125.69) and the November contract is trading at 130.0, the question might be: what path will the CHI index take through October? We’ll know tomorrow morning.
The following graphs attempt to frame one way that traders might be framing their expectations.
I would imagine that traders bidding for Nov contracts would be surprised if the CS release was not at least 50% of the interpolation of the Sept index and their Nov bid. That is, if the Oct index comes in below 127.7, to get to a value of 129.8 in November, the Oct/Nov gain would have to be higher than the Sept/Oct gain. Given seasonal factors and fear of possible declining momentum in home price increases the 129.8 bidder might would want to see at least 127.7 to feel comfortable maintaining his bid tomorrow.
Similarly, the 130.0, offer might expect some gains from Sept to Oct, and may even be comfortable with a straight interpolation from the index to their offered level (so 127.85) if they believe that upward momentum will slow from Oct to Nov. However, if the Sept-Oct gain is more than some threshold (and here I’ve arbitrarily used 60%) of the Sept-Nov interpolated gain, then he may even be comfortable up some higher level, in this case 128.3.
However, given this logic, I would imagine that any CHI index result outside the 127.7-128.3 range will see the bid or offer change before trading starts tomorrow.
Given the recent volume, the narrow bid/ask spread, and the open interest, I would expect more trades in CHIX13 tomorrow.
Feel free to contact me (firstname.lastname@example.org) if you have any questions about this report, or any other aspect of hedging home prices or home price indices.