Updating Options

The large price rises in the CME Case Shiller home price index futures exposed a need for me to update option quotes. Since it's now June, I believe that options for Feb '22 settlement are providing less protection as, recall, the Feb index covers the period Oct-Dec, and we are now only four months from October. With so much enthusiasm in the underlying real estate markets, I don't see momentum changing quickly or events that would cause a major move in the trend of indices to be released on Feb '22, and as such, the hedging value of those options is declining.

In addition, there's been growing (albeit sporadic) interest in hedging over an 18-month time horizon from California homeowners. Further, the longer time frame offered by Feb '23 options is consistent with the risks that developers would take. Builders may want to build to satisfy demand, but they might sleep better at night with some downside protection that matches their building schedules.

There are at least two appealing aspects of buying puts (as opposed to selling futures) to many retail users. First, the put buyer doesn't need to have a precise view on forward prices (as someone doing a futures trade must). All they need to get comfortable with is their own belief, that the risk-reward profile of a put payoff, hedges risk that they are concerned about. Second, the put buyer knows the absolute maximum out-of-pocket cost (the premium plus any fees) and so can budget how much they want to spend to hedge a risk. By contrast, someone shorting futures has potentially unlimited risk that prices keep rising.

While the put buyers can see these benefits, I would remind readers that while I'm willing to post quotes on some limited amount of puts where I'd write agreements (on my HPHF platform), that options as a business won't thrive unless others are willing to also write puts. If one believes that the clearing levels on Feb '23 contracts are lower than expectations (as I have written in the past), and if one acknowledges the imbalance between natural put writers (few) and natural put buyers (many), then put writers may be in the driver's seat to set terms (e.g. strikes, expirations, floors) to price puts at levels that seem like a good risk-reward. Someone willing to write a large amount of coverage (e.g. puts on $10mm) might explore incorporating the puts into a credit-linked note (CLN) and treat it as a high-yield bond. (Feel free to contact me here to discuss or for an illustration).

I have updated quotes on my options page (https://www.homepricefutures.com/options) and have posted tables for Feb '22 (for all 20 Case Shiller public indices) and Feb '23 (for the ten regional components there (and here, below). (I'll try to get to quoting puts on the "other ten" Case Shiller 20-city index components in the near future, but it's more of a challenge with no public forward prices, or markets).

Note that I'm trying to focus interest on the February expiration cycles both to avoid diffusing interest, as well as to foster discussion of clearing levels in these benchmark contracts. That said, I'd be open to writing puts (or calls) on other expirations, if there is sufficient interest.

Further, while I've illustrated suggested put levels here for various cities referenced by public Case Shiller indices, I'd be open to writing HPHF Put Agreements on other cities.

Feel free to contact me if you have any questions about this blog, have option hedging strategies you'd like to explore (on a range of cities), or just want to learn more about the use of home price index derivatives in hedging strategies.

Thanks, John

(FYI -This blog was edited on Thursday July 10 to add some comments).