CME Case Shiller Futures Overview. John H Dolan Market Maker-CME CS Futures

Transcription

1 CME Case Shiller Futures Overview John H Dolan Market Maker-CME CS Futures johnhdolan@homepricefutures.com

2 Outline Product Overview Regional Contracts Volume/ Open Interest Current Market Themes Disclosures

3 Product Overview Futures traded on the CME (Chicago Mercantile Exchange) CME is counterparty Reduces gross counterparty exposures Ease of unwind (vs. OTC trades) Level playing field on trade execution Public pricing (EQuotes, Bloomberg) Reference obligations: 11 Case Shiller indices Ten regions and one 10-city CUS index. Futures settled at expiration on value of Case Shiller index released that month Convergence of futures and index value Minimum margin levels set by CME. Clearing brokers may require additional margin Incremental margin may be required as closing prices change

4 Contract Features Contract notional value =$250 * Index E.g. WDC index =200, Notional value/ contract = $50,000 Contracts settle last Tues of expiration month Last trading day is business day before expiration Trading hours 8:15 AM-3 PM (Chicago) Trading increments 0.20 = $50 11 expirations Feb, May, Aug, Nov expiration cycle Current expirations: Nov Nov 2017 First six quarters New Nov expiration added as front one expires

5 Case Shiller Index Features Repeat-sales index Independently calculated by CoreLogic Reported by S&P Weighted 3-month moving average Released monthly with two-month delay on last Tuesday Example: Index release in July covers March-May Aug index release contains two components of May index Predicting Aug : Estimates of V (Value) 1-4, W Weight) 1-4 Past periods can be revised leading to changes in time series

6 CUS (10-city index) Graph Oct 31 The graph of CUS historical index and CME quotes shows: Mid-market levels a/o Dec 11 (red-dash), Dec 12 (black-dash), Oct 31,2013 (green) all versus left axis Bids (blue), offers (red) across 11 expirations Historical CS index (in black) since Nov 10 (Sept 10 index) Increase in levels over Dec 12 (Feb 13 release, brown square) index values right axis Convergence of spot CS index to front (Nov 13 ) contract

7 Convergence Future settle on the index value released on the last Tuesday of the expiration month. As such, futures prices and index levels must converge (or there would be an arbitrage). This graph shows the price history of each of the Nov contracts over time as they move toward expiration.

8 One year bull market in CME Futures CME EQuotes graph of closes on CUS (aka) HCIX16 contract 27% price increase since June rally has loss momentum. Stable prices have allowed bid-ask spreads to compress

9 Trading of Future Index Values CME Case Shiller futures are based on the value of an index at some point in the future. An understanding of the calculation of the index is critical for trading and analysis. Index levels will be impacted by a change in the value of a subset of the index ( noise ). e.g. If the percent of distressed houses falls from 30% to 20% over a year, and if those distressed houses sell at a 25% discount to normal, then the index might rise 2.5% in a year ((30%-20%)*25%) as the asset composition becomes less distressed, even if all other asset prices remain unchanged. If % distressed is correlated with % severity this impact may be larger An understanding of such factors is critical to: Implied cash and carry trades, Qualifying any implied forward HPA analysis, Appreciation of basis risk when hedging single assets or pools of assets that don t exactly mirror the index composition Such noise likely had a big impact on index values coming out of the housing crash (particularly in distressed areas). The impact to futures contracts maybe lower during periods of less frequent noise but still needs to be recognized.

10 Market Expectations Given qualifiers on previous page, and convergence of futures to forward index levels, futures prices may be used by some to infer market expectations of future index values and/or implied HPA (Home Price Appreciation) See illustration below from HUD Monthly Housing Scorecard Even thinly traded markets (e.g. Iowa Electronic Markets) have show strong predictive power on larger events (e.g. Presidential Elections) That said, traders can buy, sell, hedge for a variety of reasons beyond expectations of forward values. Imbalance between buyers and seller may result in variance from expectations. In time, as expiration approaches, differences between market prices and expectations should be arbitrated away

11 Regional Exposure 10 Regions: Boston (BOS) Chicago (CHI) Denver (DEN) Las Vegas (LAV) Los Angeles (LAX) Miami (MIA) New York (NYM) San Diego (SDG) San Fran (SFR) Wash, D.C. (WDC) CUS (10-City) (CUS or HCI) Reference areas tend to be much broader than downtown urban area Regional reference areas detailed in Case Shiller methodology

12 CUS 10-city Index Weighted average of ten regional indices based on 2000 market weightings Quoted as CUS (or HCI) on different systems Typically most active, tightest traded contract CUS index weights subject to potential change post 2010 census Region W eight Boston 7.41% Chicago 8.89% Denver 3.68% Las Vegas 1.48% Los Angeles 21.16% Miami 4.99% New York 27.24% San Diego 5.51% San Fran 11.79% W ashington 7.85% W eighted Avg %

13 Prices- Regional Contracts CME Case Shiller Futures a/o 31-Oct-13 3 Bid Ask 4 Bid Ask 5 Bid Ask Bid Ask 7 Bid Ask BOS CHI DEN LAV LAX BOSX CHIX DENX LAVX LAXX BOSG CHIG DENG LAVG LAXG BOSK CHIK DENK LAVK LAXK BOSQ CHIQ DENQ LAVQ LAXQ BOSX CHIX DENX LAVX LAXX BOSG CHIG DENG LAVG LAXG BOSK CHIK DENK LAVK LAXK BOSX CHIX DENX LAVX LAXX BOSK CHIK DENK LAVK LAXK BOSX CHIX DENX LAVX LAXX BOSX CHIX DENX LAVX LAXX Bid Ask 9 Bid Ask 10 Bid Ask 11 Bid Ask 12 Bid Ask MIA NYM SDG SFR W DC MIAX NYMX SDGX SFRX WDCX MIAG NYMG SDGG SFRG WDCG MIAK NYMK SDGK SFRK WDCK MIAQ NYMQ SDGQ SFRQ WDCQ MIAX NYMX SDGX SFRX WDCX MIAG NYMG SDGG SFRG WDCG MIAK NYMK SDGK SFRK WDCK MIAX NYMX SDGX SFRX WDCX MIAK NYMK SDGK SFRK WDCK MIAX NYMX SDGX SFRX WDCX MIAX NYMX SDGX SFRX WDCX

14 CASE SHILLER HISTORY/ CME HOME PRICE FUTURES A/O 31-Oct 10-CITY INDEX MIAMI Price CUS Case Shiller Index/CME Futures Bids Offers CS % v Dec '12 Mid Dec '11 Dec '12 36% 30% 24% 18% 12% 6% 0% -6% -12% Price MIA CS Index/CME Futures Bids Offers CS Mid Dec '12 % v Dec '12 45% 35% 25% 15% 5% -5% -15% NORTHEAST REGIONS Price BOS CS Index/CME Futures Bids Offers CS Mid Dec '12 % v Dec '12 30% 24% 18% 12% 6% 0% -6% Price NYM CS Index/CME Futures Bids Offers CS Mid Dec '12 % v Dec '12 30% 25% 20% 15% 10% 5% 0% -5% Price WDC CS Index /CME Futures Bids Offers Mid CS Dec '12 % v Dec '12 40% 30% 20% 10% 0% -10% WEST COAST REGIONS Price SFR CS Index/ CME Futures Bids Offers CS Mid Dec '12 % v Dec '12 60% 45% 30% 15% 0% -15% Price LAX CS Index/CME Futures Bids Offers CS Mid Dec '12 % v Dec '12 50% 40% 30% 20% 10% 0% -10% Price SDG CS Index/ CME Futues Bids Offers CS Mid Yr-End % v Dec '12 48% 36% 24% 12% 0% -12% MIDDLE AMERICA Price CHI CS Index / CME Futures Bids Offers CS Mid Dec '12 % v Dec '12 48% 42% 36% 30% 24% 18% 12% 6% 0% -6% -12% Price DEN CS Index/ CME Futures Bids Offers CS Mid Dec '12 % v Dec '12 40% 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% Price LAV CS Index/ CME Futures Bids Offers CS mid Dec '12 % v Dec '12 54% 45% 36% 27% 18% 9% 0% -9% -18%

15 Bid/Ask Spreads The chart below show bid/ask spreads at a point in time on the 121 contracts. (11 regions x 11 expirations) Historically front contract <3 points, 1 year forward <6 points Higher value indices (e.g. LAX, WDC), California markets typically trade with wider bid/ask spreads Some regions (CUS, NYM here) often trade tighter than others Lowest bid/ask spreads: Spring 2012, all X16 contracts < 10 points Outright bid/ask impacted by calendar/inter-city spreads 11/1/2013 Contract BOS CHI CUS DEN LAV LAX MIA NYM SDG SFR WDC AVG 30-Nov-13 X Feb-14 G May-14 K Aug-14 K Nov-14 X Feb-15 G May-15 K Nov-15 X May-16 K Nov-16 X Nov-17 X BID-Ask $

16 Open Interest (OI) Open Interest for the last few years has been in the range. Oct highest on spike on trades in CHIX13 contract OI tends to concentrate in the Nov expiration cycle (81%) Nov is always longest contract, garnering interest from longer-term hedgers With early OI, November tends to have tightest markets (see bid/ask page) CUS typically has the largest OI (due to widest interest, tightest markets) Regional OI varies: at times DEN, LAV, CHI, NYM have all led. CHI today All Open Interest -a/o 1-Nov Contract BOS CHI HCI DEN LAV LAX MIA NYM SDG SFR W DC Total Nov Feb May Aug Nov Feb 15 0 May Nov May 16 0 Nov Nov SUM

17 Volume Volume has been picking up. Highest level since June 2012 High volume at contract inception ( ) but then fell off sharply during on absence of buyers Volume tends to pick up as markets change direction, as bid/ask spreads narrow, or when calendar spread trading increases. Volume Contracts Traded YTD By Month Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec

18 Calendar Spread Markets Calendar spread quoted front contract minus longer contract Negative Calendar Spread # s = Increase Year/Year % difference Calendar spread quotes often inside outright bid/ask of individual contracts Often useful to compare Calendar spreads vs. Mid/mid-market levels Nov expirations shown to eliminate seasonal factors Annualized % Difference used by some for projected HPA (see qualifiers on Markets Expectations page) Calendar Spread Markets: Quoted in Points (Front- Back) HCI Outright Markets X14 X15 X16 X17 Bid Ask Mid Bid Ask Bid Ask Bid Ask Bid Ask HCIX HCIX HCIX HCIX HCIX Annualized % Difference Front vs. Back (HPA?) Bid Mid/ Mid Ask Bid Mid/ Mid Ask Bid Mid/ Mid Ask Bid Mid/ Mid Ask HCIX13 6.2% 5.7% 5.3% 5.9% 5.0% 4.1% 5.4% 4.7% 4.1% 5.4% 4.5% 3.6% HCIX14 6.1% 4.3% 4.2% 5.6% 4.3% 3.4% 4.8% 4.0% 3.1% HCIX15 4.4% 4.2% 3.7% 4.4% 3.9% 3.5% HCIX16 4.7% 3.6% 3.3% HCIX17

19 Calendar Spread Markets: Regions One-year calendar spread quotes (top) converted into % change (bottom) similar to prior page Longer-term calendar spreads (e.g. CUSX13_X17, not shown here) may be more useful for longer-term implied HPA than linked one-year spreads Using Calendar Spreads, and Mid- to Mid Market Qutoes, for Implied HPA X13 X14 X15 X16 Spot X13 X14 X15 X16 X16 X17 Mid Bid Mid Ask Bid Mid Ask Bid Mid Ask Bid Mid Ask HCI (11.2) (9.6) (11.6) (8.0) (8.8) (7.4) (9.6) (6.8) BOS (8.6) (6.0) (10.2) (5.2) (10.8) (6.0) (12.0) (4.4) CHI (7.6) (4.6) (12.0) (3.0) (9.8) (1.6) (9.8) (3.0) DEN (12.0) (6.0) (11.0) (4.0) (11.2) (2.2) LAV (12.0) (7.8) (2.2) (11.0) (2.4) (9.0) LAX (15.8) (12.0) (9.4) (17.0) (5.0) (17.0) (5.0) MIA (14.0) (8.0) (7.0) (14.0) (13.0) (5.2) NYM (9.4) (7.2) (11.6) (12.0) (6.6) SDG (12.0) (15.0) (6.0) (15.0) (5.0) (13.0) (3.0) SFR (19.0) (12.2) (8.0) (16.0) (6.0) (14.8) (5.8) WDC (16.4) (9.4) (15.4) (6.6) (14.0) (6.0) (6.2) Calendar spread Quotes (Bid/Ask in table) vs. Mid-market to Mid-Market Outright Quotes Spot X13 X14 X15 X16 Spot X13 X14 X15 X16 X17 X16 Mid Bid Mid Ask Bid Mid Ask Bid Mid Ask Bid Mid Ask HCI 0.48% 6.2% 5.68% 5.3% 6.1% 4.27% 4.2% 4.4% 4.24% 3.7% 4.7% 3.64% 3.3% BOS 0.02% 5.1% 4.34% 3.6% 5.8% 3.82% 3.0% 5.9% 4.33% 3.3% 6.3% 2.79% 2.3% CHI 0.09% 5.9% 4.85% 3.6% 9.0% 4.25% 2.2% 7.0% 4.58% 1.1% 6.7% 4.18% 2.1% DEN 0.71% 8.1% 6.01% 4.1% 5.67% 6.6% 4.34% 2.4% 6.5% 3.58% 1.3% LAV 1.78% 9.5% 7.21% 6.2% 4.06% 1.6% 7.8% 5.46% 1.7% 6.1% 4.51% LAX 0.53% 7.5% 6.43% 5.7% 4.57% 4.2% 7.2% 3.40% 2.1% 7.0% 3.86% 2.1% MIA 1.11% 8.1% 6.27% 4.6% 5.02% 3.8% 7.3% 4.58% 6.5% 4.53% 2.6% NYM 0.37% 5.4% 4.85% 4.2% 5.95% 6.0% 4.06% 6.0% 3.20% 3.3% SDG 1.11% 7.07% 6.2% 7.2% 3.85% 2.9% 7.0% 3.71% 2.3% 5.8% 4.20% 1.3% SFR 0.88% 10.5% 7.94% 6.8% 5.50% 4.1% 7.8% 6.09% 2.9% 6.8% 4.46% 2.7% WDC 0.67% 8.0% 5.93% 4.6% 7.1% 4.36% 3.0% 6.2% 4.62% 2.6% 3.78% 2.6%

20 Inter-City Spreads Limited trading over past year Typically quotes posted at any time Expressed as point spreads (e.g in CUS_NYM X17 Intercity Spread, see below) but can be converted into relative % moves Very useful for isolating calendar, relative price movements Best where one market is very tight (often CUS/ HCI ), or when both markets are highly correlated (e.g. BOS v NYM, LAX, v SDG) Great way to frame the question Will NYM outperform CUS over the next 4+ years? (In this example, a toss up) Outright X17 Markets Price %>Spot HCIX17 NYMX17 % HCIX17 % NYMX17 % Diff HCI Index Bid* Ask Bid>Spot Ask> Spot HCIX17 Bid % Bid % 21.5% -1.5% Ask % Mid % HCIX17 NYMX17 % HCIX17 % NYMX17 NYM Index Ask Bid** Ask> Spot Bid>Spot NYMX17 Bid % Ask % 19.9% 1.4% Ask % Mid % * Bid used for analysis is NYMX17 ask plus IC bid of 5 ** Bid used for analysis is HCIX17 ask minus IC ask of 10 ***5/10 IC market compares with 2.2/13.4 Arb market Arb Market = execute on outright levels Inter City Market (first minus second contract)

21 Options Options trading was a large part of trading Went dormant after 2008 pit-traded thereafter Electronic trading of 4 contracts (CHI, CUS, LAX, NYM) re-introduced in 2012 Other contracts still may be traded off-line, executed in pit No volume since re-introduction Platform still available Useful for: Implied volatility trades Delta-neutral hedges Covered Call/Put writing Straddles/Strangles Calendar Spreads Bull/Bear Option Lower margins on expiring contracts Minimum price increment = 0.10, $25 My sense is that options are best traded in pairs to reduce extreme tail risk e.g. coverage of % LTV exposure Inquire if any interested in discussing an option strategy

22 Market Color Quotes E-Quotes Bloomberg CME Web Sites Commentary www. Homepricefutures.com Blogs on Trading Basics section recapping Contract/Index features LinkedIn group CME Case Shiller Home Price Futures Forum to promote discussion of forward index values, trading Posting of trades, best markets

23 CUS (10-city index) Graph Sept 30 The graph of CUS historical index and CME quotes shows: Gradual growth in forward index levels to +>35% (over Dec 12 index) by Nov 2017 Continued curve steepening (vs. 2012) as longer-dated contracts incorporate higher HPA for a number of years. Implied HPA for = % One more jump in Case Shiller index priced into front contract (Nov 13) over spot (combination of seasonal and trend factors).

24 Year-end (2013) Markets CME mid-market prices for the Feb city index contract are consistent with a nearly 14% increase over the CUS Dec 12 index. California markets (particularly SFR) have the highest forward prices. BOS, CHI, NYM and WDC (~51% of CUS 10-index) remain the laggards

25 CUS futures almost back to past highs The graph below shows prices for the historical Case Shiller 10-city index (black) linked to CME futures mid-market prices (green) out to Nov 2017 and then projections at 3 and 4% HPA thereafter. The Nov 17 prices are within ~10% of past highs (The mid for DENQ is already above past highs, while LAV has a LONG way to go.) At 4% HPA (post Nov 17), full retracement on CUS has moved up to 2018 (from 2021 this spring). This raises issues of what happens when many borrowers are no longer underwater.

26 Nov Contracts The bar diagram shows: Bid/ask/mid bar chart for each of 11 markets across 3 Nov expirations Values are % of price/spot Each region has five bars (Nov expirations) Height of bar reflects bid/ask spread (e.g. NYMX15 tight, MIAX15 wide) Market prices are consistent with higher CS # s for next 2+ years (~+16% in CUS/HCI for Nov 15 contract) Greater forward price appreciation in warm (right) states

27 Disclosures Risk Factors/Disclosure This report was prepared by an independent market maker of the CME Case Shiller futures contracts. The views expressed are his own and should not be construed to represent the views of the CME, S&P, CoreLogic, or any other entity. The author makes no representations as to the accuracy or completeness of any information contained in this report. The information gathered was at a point in time. The bids/offers described here are dated and may not exist in the current market. The quotes shown are for a minimum of one lot. There is no guarantee as to the depth of the market, not is there any guarantee that an on-going bid/ask spread will be made in every market. The observations made herein is for informational purposes and should not be considered investment advice nor a recommendation to trade futures. Futures trading may be risky and one should consult a futures broker before trading. The indices that these contracts reference may be subject to revision. One should not trade these futures without a through understanding of factors that might impact the indices. The author will not be liable for any errors or omissions in this information, nor will the author be liable for any losses, injuries, or damages As market-maker the author may have positions, bids or offers in any of the futures discussed.