CME Housing Futures

[cooperthedog]

Daniel – All the gory details of how the Case-Shiller Index is calculated can be found here:

http://www.macromarkets.com/csi_housing/documents/TradableCSI_Primer_Brochure.pdf

I believe you’re right in assuming that the index won’t be able to capture all features of the housing market, but it should be acceptable to “bet” on for retail investors, though institutions may balk at the imprecise underlying.

[cooperthedog]

The lack of volume and the wide spreads are a deterrent to *trading* these contracts, but you will always get the market price on the contract, it may not be inline with the underlying, but it will be at the market – which brings up the lack of arbitrage on such an index, which is another strike for trading these.

For those investors who are so sure of a large crash in the upcoming year, holding until settlement or expiration would allow you to get the market (index) price.

Homebuilders have already taken a beating (not to say that won’t continue), and may have significant exposure to markets outside of CA that aren’t so overvalued. Plus you have to factor the risk of buyouts if the stock gets too low, etc. Compare this to the San Diego CS Index value, which is only down a few percent down from the 2005 peak. It would appear that there is alot more downside potential there, if a crash does occur, which may justify the spread & lack of liquidity on a CME housing put.

[Anonymous]

Chris Johnston

Anxvariety

Maybe you should learn a bit more about trading before you make comments like these. I do not think you would want me to go into enough detail in this forum to reveal the stupidity of this and the next comment about volume being factored into the price that you made.

Sorry if I offend anyone else with this, but this type of comment has to be called out for fear of others reading this and not understanding the futures markets properly.

For the rest of you, volume in markets is of the utmost importance for fill purposes. Anyone who actually trades knows this.

[powayseller]

Chris, thanks for correcting the error made by the poster. I was surprised at his comment too. Since when is the future expected volume factored into the price of an asset?

[smfj]

All of this confusion proves (to me) why it is best for casual investors (like myself) to stay away from derivative products. There’s just too much involved in understanding and evaluating them (and this comes from someone with some significant knowledge of security valuation).

It is my belief that the tech bubble, and now the housing bubble, has been fueled by people getting into stuff they just don’t understand.

[lewman]

Been following the housing futures’ pregnancy since last year. I was happy finally the child was born … but there just isn’t enough volume for trading … hopefully one day interest will increase. In the mean time I was looking at shorting builders but when I looked at it back in March I thought the sector has already gotten too cheap (the big names already have PEs in the single and sometimes low single digits) but then of course the cheap got cheaper ha ha ha.

But then if may07 SD contract is currently priced at -3% from current index level may be it’s not all that bad to do a buy and hold. I prefer options for this type of strategy coz I can just go away and not have to worry about margin call etc but I imagine the premium and spread would be quite high given the illiqudity. I go to check the options page from time to time but it’s always blank does anyone know why ? Are CME housing options just not yet launched or am I looking at the wrong places ?

[cooperthedog]

leung_lewis: The options page is a link to an XL file (not quite real-time…), I’ve always found it populated:

http://www.cme.com/files/housing_ioq.xls

It appears that the bid/ask on a May07 put (strike 242) is 9 – 12.5 (yuk). The current price for May07 futures is now ~4-5% lower than the May06 CSI, with a bid/ask of 236.8-238.6.

Also, it is my understanding that the contracts are roughly two months behind, so the May07 is settled based on the value of the March CSI. The CSI is based on SFR, so it doesn’t look like a condo crash would influence it. The index is rather nebulous as underlying, maybe that correlatates to the low interest?

Open interest is tracked here:

http://www.cme.com/daily_bulletin/Section46_Housing_Futures_And_Options_2006142.pdf

[lewman]

thanks coop; I guess the best we can do at the moment is to monitor the situation

I have zero experience in buying futures; do you have any expereince and know of an online broker that’s friendly to small investors with only a few thousand to do this ?

[Anonymous]

Chris Johnston

Leung – almost any of the big brokerage firms will let you open an account with 5k deposit. Lind-Waldock, Alaron, EDF Mann, Interactive Brokers ( I do not recommend them ), Trade Station Securities. There are other, but those are the biggies.

[cooperthedog]

Leung, futures are highly leveraged. The performance bond (margin) required for the San Diego contracts is ~2K (one contract is ~75K). Also, futures are “marked to market” daily, so should you sell a contract, and it increases in price, for any reason, you will have to put up more money.

So, even if the CSI closes down 20% in the next 9 months, but prices rise/fluctuate in the interim, you will need more capital to meet margin. Add to that the lack of liquidity and you will be taking on an awful lot of risk if you can’t hold until settlement (and that’s assuming that the market declines more than the 4-5% current discount).

I’d also make sure to analyze how the underlying CSI works in detail. Since this index comes out once a month and is not really “commoditized”, it will be impossible to gauge what the current value is day to day. With no ability to arbitrage the index, prices could theoritically be manipulated.

I still think it is any interesting, and potentially profitable way to play the decline, but it sounds like you need more risk capital before considering it further.

Chris J. appears to be a pro futures trader, so I would ask him what the appropriate capitalization would be to enter into a contract (under the assumption that SD RE will plummet near term & with the intent to hold until settlement).

[powayseller]

Very interesting cooperdog. Are you investing in any commodities, options, or shorts?

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