Part 1: The CME announced today some important changes to the expiration schedule of the Case Shiller home price index futures(and options, see below). They embraced two ideas that I have long advocated should improve interest in, and trading of, the contracts to include:
1) Reducing the number of expirations that can be traded at any time from 11 to 10 (to start) and eventually, to 9, and
2) Shifting the longer-expiration contracts from a November to a February expiration cycle.
The new set of expirations will continue to allow trading in very short contracts (i.e. < 1 year to run), and annual contracts running from 1-5 years. While some users might prefer a contract that hedges an exposure out for exactly 1.5 or 2.5 years, given the current activity in these contracts, I believe that the benefits of concentrating inquiries into fewer contracts, and thereby possibly increasing the liquidity and the depth of this market, are more important. ^1 The chance for random encounters, across a fixed number of users, should increase as the number of contracts shrinks. ^2 In effect, “Less is More”.
The shift to a focus on February expirations should better align these contracts with the annual home price forecasts that investors see. ^3 Recall that Case Shiller indices cover activity with a two-month lag. As such, the February contracts reference the year-end Case Shiller indices. With a longer February contracts to trade, users will have the ability to compare clearing levels on the home price contracts for calendar years- either using outright contracts, or calendar spreads - with housing research. (See a recent blog for how one might use Feb/Feb calendar spreads: Using Calendar spreads to weigh in on 2020 HPA debate - a review and opportunities).
Further, the change to a focus on a February expiration cycle is designed to recognize the importance of investors and speculators. My sense is that there has been an imbalance between natural longs and natural shorts. (See past blogs CME Futures: Expectations vs Clearing Levels, Opportunity or Bias? and Are CME Case Shiller quotes inconsistent with sentiment ). The shift to a February cycle is an attempt to capture potential investor and speculator interest should calendar year price differences be attractive versus forecast or other assets.
Finally, my hope is that structured products referencing a year-end index, will be more attractive that contracts referencing September home prices (as the November expiration cycle currently does). (See Nov 5 blog Home Price Index Returns, in structured product format as an example of what might be done.)
As noted in the CME announcement, some contracts that were open last week will no longer be traded today (until they come up again in the forward cycle). As I’ve highlighted in my monthly recaps (See link to Dec recap) each of the closed expirations (May 21, Nov 21, May 22, Nov 23, and Nov 24) had zero open interest.
Of the remaining five contracts from last week, four (Feb 20, May 20, Nov 20, Nov 22) had open interest and will remain open. The Feb 21 contract will also remain open as it is part of the Feb expiration cycle. These five contracts will continue to trade.
Four new contracts (Feb 22, Feb 23, Feb 24 and Feb 25) will be ready to trade on Monday Feb 10.^4 Unfortunately, I will be traveling Monday Feb 10, but will be at my desk making markets in many of the new expirations starting Tuesday morning Feb 11. (As such, you may not see complete markets on Monday Feb 10).
For anyone looking to switch to what I expect will be the new benchmark for intermediate hedging (Feb ’23), I’m going to be posting tight Nov ‘22/Feb ’23 calendar spreads. (See next blog for my views on Nov 22 -which will be the longest expiration contract until Feb 11, and how users might consider rolling from the Nov 22 contract to Feb 23).
As some have noted, I’ve shied away from commenting on, or making markets in Nov ’23-’24 contracts, while the CME worked on this announcement. I look forward to posting quotes on the new longer-dated contracts when they open and to prompting discussion about how readers might consider using these new expirations in your investment, trading, hedging strategies.
The second part of the CME announcement is that they will no longer host trading in options on the Case Shiller futures. While I’m disappointed to see the loss of any hedging tool, the reality has been that options trading has been a tiny fraction of futures trading (e.g. there were only 7 option lots traded in 2019), the process for valuing the closing price of options is much more complicated, and the number of options that could potentially be traded exceeds 1,000. In sum, the options contracts involved a much higher degree of work, for decidedly lower volumes.
I’d like to work with hedgers as to a back-up plan for options trading. Readers here should be aware that I’ve structured the OTC home price index agreements (referencing the Freddie Mac NSA home price indices) on my Home Price Hedging Fund as options. I’m open to offering similar OTC options there, and have other ideas to provide options coverage -that I’ll flesh out in time.
Please feel free to contact me should you have any questions on this announcement, trading ideas you’d like to discuss, or any aspect of hedging(adding or reducing) exposure to home price indices.
Thanks,
John
^1 Someone looking to hedge 1.5 years might consider a combination of 1- and 2-year contracts.
^2 I’m an advocate for further concentrating interest by suggesting that users view the contracts for the first hour (9:15-10:15) to see if overnight news, or early morning economic releases, had an impact on prices, and then again in the last half hour (3:30-4:00) of trading.
^3 For example, Pulsenomics, Core Logic, Zillow and other research firms have calls for home price moves during 2020.
^4 Clearing firms need time, and a weekend, to open new contracts.