August 2021 Contract Expiration - 2+ weeks away

I'm sorry for not blogging in a while but I've been distracted by other market-making obligations (i.e. water, emissions) and expert witness work. However, some trading in the Case Shiller home price index contracts this week, and some very tight markets (Thank you to other parties for weighing in with bids and offers) prompts me to post this update.

We are 2+ weeks away from the expiration of the August 2021 (Q21) Case Shiller futures. Recall that the last day of trading will be Monday Aug 30, that these contracts stop trading at 3 PM Eastern  (even though the others remain open until 4 PM) and that the contracts settle on the index values released on Tuesday August 31 at 9 AM.^1

After a long stretch of limited activity, there's been some trading in HCI, DEN, and SFR contracts.  Those contracts, and LAX and NYM have seem bid/asked spreads compress closer to "normal" levels with less than one month to run. ( I might question what "normal" is given COVID and the explosion in home prices over the last year, and would remind readers that since index levels have near doubled since the bottom, a 4-point bid/ask spread today, is the same percent as a 2-point market in 2012).

The table below shows quotes on the eleven August 2021 contracts as of mid-morning Thursday August 12th.

Bid/ask spreads are generally tightest after a trade, and the DEN market illustrates the point.

Bid/ask spreads also tend to narrow as traders are quoting markets on activity that is history. (Recall that the August release references activity from April to June. As such, the LAX market (352/353) might represent how traders perform their own estimates of what has happened, or traders looking to even out positions, but it does not hedge any future activity in the underlying home prices.)

Finally, I've also added the percentage difference between the mid-market values and the index released in August 2020. If mid-market values are realized, we're in for another round of headlines touting 18+% gains in many regional indices.

While the Aug '21 contracts reference past activity, I would prefer to focus interest on longer-dated contracts (starting with the Feb '22 expirations) as then we could encourage debate on some hedging strategies.

Given the large uncertainty about forward prices, I've pretty much stuck to quoting G22 and G23 (Feb 2022/ Feb 2023 expirations) as ever-wider bid/ask spreads in longer dated contracts seems to be more of a turn-off to some. You may see quotes in regional contracts beyond G23 but that is primarily my work to have closing prices show some element of rising prices (as academics might cite the data later). Recall that I also want to build the notion of using ratio agreements (combined with outright trades in the 10-city index contracts) for those looking to express views on regional indices.

That said, I'm happy to try and work any trading axes. Feel free to contact me if you've got any hedging/trading ideas you'd like to explore. This includes other cities, as I've had recent inquires on Austin, Oakland, Miami and Sacramento.

Thanks,

John

^1 Indices are always update on the last Tuesday of every month.