I've posted a recap of activity in the CME Case Shiller home price index futures for January. Readers can find the report in the Resources section, or link here.
Highlights include:
P8-During January 17 lots traded across 7 regions and 2 expirations. (This was previously reported as 12 trades across 10 regions).
P4/5-Prices were generally higher (with the exceptions of BOS & WDC).
P6-Bid/Ask spreads were slightly tighter.
P7-Forward curves were mostly unchanged.
-I’ve quoted bids in all 88 contracts (except G27)to keep closes current.
P8-Average time to expiration extended slightly to 0.48 years. Fortunately, most of the inquiries I’ve been getting are for much longer expirations.
P9 -There is OI in every regional contract but that will lapse post Feb '22 expiation. Help needed on BOS, MIA, NYM, and SDG.
P9 -OI is concentrated in two expirations. G22 & G23 have 35 of 40 lots. I'm open to adding to G24-G26 but want to focus eyeballs on Feb expirations until volume is 3-5x larger.
P10-13- I’ve highlighted three pages on how Intercity spread quotes can be interpreted to show pricing on implied out-/under-performance of ten regions with CME futures.
This concept is the key to pricing forward regional contracts. In addition, a "Relative Performance” approach can be expanded to show forecasts on, or to hedge, other cities that do not have CME contracts, by using HPHF Ratio Agreements. For example, the ratio of the ATX (Atlanta) vs HCI (10-city index) shows that Atlanta prices were slightly outpacing 10-city index prices (as the ratio increased). However a jump in the ratio is priced in for Feb 2023 -consistent much larger outperformance by ATX.
One can enter a stand-alone HPHF Ratio Agreement (w/ 7-8% up-front payments), or combine it with longs/shorts in the HCI contracts, to effect an outright hedge on ATX. (Caution - HPHF Agreements are bounded so the hedge might not be a 1:1 hedge should the ratio exceed the boundaries). DM to discuss any ideas or to propose alternatives.
-I’m getting a growing number of inquiries for puts, and am always looking for put writers, especially for California markets.
Feel free to contact me if you have any questions about this blog, have trading ideas that you'd like to discuss, or just want to learn more about the use of home price index derivatives in home price hedging strategies.
Thanks, John