The expiration of the Nov 2021 (X21) contracts and the updates of the Case Shiller indices on Tuesday morning proved once again, that there are opportunities to profitably trade the contracts up to the last minute.
I have two summaries to discuss: 1) how the Case Shiller index numbers varied from the expiring contracts, and 2) the impact on other expirations.
1- CONTRACT EXPIRATION
The table below illustrates that six of the updated Case Shiller indices (highlighted in green) were higher than the offered side of the expiring Nov 2021 CME contracts. In the largest outlier, one could have bought LAXX21 at 363.6, and realized $487.50 per contract^1 as the index value for settlement was 1.95 points higher.
In the NYM region, the index was lower than the bid side of the expiring contract, showing that one could have sold the contracts before expiration and made a profit.
In two regions (CHI, and WDC, highlighted in yellow) there were significant revisions to the prior month's index values. While such revision impact the current index value (as the index is a 3-month moving average), the impact did not push the current index value outside the bid/ask range on the expiring contracts.
This weekend, I had posted a blog highlighting how Nov '21 contract prices appeared low vs. October index values, and inconsistent with the gains priced into the Feb '22 contracts. I should have followed my own thinking and bought the contracts!
Glibness aside, the seven "surprises" (6 over/ 1 under) ^2 this month are not a record,^3 but they are more than the 3-4 "surprises" often seen in quarterly expirations.
IMPACT ON OTHER EXPIRATIONS
The surprises detailed above, impacted the clearing levels I posted on the Feb 2022 (G22) contracts. (While I'm aware of at least three third-party bids and offers, the bulk of the quotes on the day after the Case Shiller indices are updated tend to be mine).
Several of the regions that saw index surprises saw the biggest gains in the mid-market value of their respective Feb 2022 regional contract (e.g. BOS, MIA, SDG). Further, the only contract with a lower mid-market post numbers, was the NYM region, which was the index surprise to the downside.
Gains averaged ~2.0 points across the contracts, and bid/ask spreads widened. (Bid/ask spreads tend to widen the first day or two after an index update - absent trades - as users (including me) - try to figure the impact of the updated index values. While I often spend the time between an index update and month-end to "tweak" quotes, updating calendar and intercity spreads, in this case the index was released on the last day of the month. As such, I'll probably prepare my "month-end" recap on Wednesday or Saturday
Additionally (not shown) the stronger-than-expected index values (as defined as surprises), gains in the Feb '22 contracts (and possibly the impact of news on Omicron- back to needing more space/ lower interest rates), gave a bid to longer expirations. Implied HPA bids on both the Feb '22/Feb '23 and Feb '23/Feb '24 calendar spreads rose, giving the curves a tad more steepness. (although still at clearing levels that are well below 2022 HPA gains called for by Goldman Sachs and AEI.)
Net, Tuesday was a busy day for price moves (but alas, not trades).
Please feel free to contact me if you have any questions about this blog, have trading ideas you'd like to discuss, or just want to learn more about how one might use home price index derivatives in hedging strategies.
Thanks, John
FOOTNOTES:
^1 -Ignoring fees
^2 -I define a surprise as an index value outside the bid/ask range on the expiring contracts.
^3 -My recollection is that there have been quarters when all 11 index updates fell inside the bid/ask spread of the expiring contract, as well as a month where all 11 fell outside (May 2012?).