Longer-term users might recall that the CME originally allowed for the exchange-based trading of puts and calls on the CME Case Shiller futures. In 2006-2007, option volume mirrored that of futures. After the CME re-introduced options in 2012, there were only sporadic trades from a few builders, home-flippers, and speculators, where I wrote all of the puts. However, given the limited number of trades after 2014, combined with the >1,000 permutations (121 contracts * 10+ strikes * either put/call) that might have to be priced (if only for margin), the CME closed trading in options effective Jan 27, 2020.
As I have continued to receive inquires on options over the past few months, I thought that is made sense to offer a OTC version of an options program, which I've launched today.
I've posted below offered side indications on where I'd write OTC versions of options on the Case Shiller indices. As with how I approach futures, I'm going to focus on the G22 expirations. The slightly greater than one-year term seems to fit many hedging inquiries. As with the CME options, these agreements can be re-traded, or will cash-settle at expiration. Note again, though that this will be an OTC product, not one offered by the CME. As such, please contact me if you have any trading questions.
A major difference (other than OTC trading) is that puts will provide only a range of coverage, not unlimited downside protection. For example, floors on the G22 options show below are set at approximately 90% of strike. As such, put buyers can think in terms of "how much would I have to pay upfront for 10% downside (from the strike)".
The purpose of this is two-fold: 1) to cap (and quantify) risk to put writers, and 2) to signal my belief that only the Government should be writing extreme tail risk to certain events that might cause a large drop in home prices (e.g. earthquakes, terrorism, climate change). PMI companies are open to writing longer insurance, but their product requires both an event (the sale of the house) and a loss (the sale at a loss) for their programs to cover.
The purpose of this program is to make a hedge available to those that want coverage against a decline in a home price index (not an individual home), over a relatively short horizon (i.e. < 2 years), but who may not want to have to move/sell to monetize the protection. Those with short-term bearish views on home prices (e.g. foreclosures following end of forbearance), owners of investment properties, might consider reading more.
I'm open to other expirations and strikes, to include referencing other Case Shiller indices (e.g. Atlanta, Cleveland, Charlotte, Dallas, Detroit, Minneapolis, Phoenix, Portland, Seattle and Tampa), (see future blog on "other ten") and degrees of in-/out-of the money puts (and calls) but to start would like to focus on one-year, near at-the-money puts as the building block for all others, and would like to focus inquiries on fewer agreements to start.
Option agreements would be written on the HPHF platform so counter-parties would need to fund the full exposure up-front. For put/call buyers, that would be the premium. "Put writers" would structured as deep out-of-the money, capped calls. For example, the put writer on the HCI option would be buying a call on HCI with a 210 strike and a 235 cap, and would need to pay that option premium upfront. As before (when CME had contracts) finding users willing to "write puts" will be key.
Please feel free to contact me with any reactions to the form of these agreements, the levels I've posted, or if you have ideas on other combinations.
Thanks,
John