CME Housing Futures and Options

The Chicago Mercantile Exchange launches exchange-traded housing market index based futures and options market.  We've discussed these quite a bit on the Patrick.net blog; most recently on this thread.

The CME's official web page for these new markets can be found here.

Live real-time futures  quotes are here.

You can  track the San Francisco Bay Area's futures prices here.  SFRY is the index.

Direct closing quotes from the CME are here.

In this thread we solicit trading strategies from our readers.  Speculation or hypothetical hedging are strategies are both welcome.  We'll select the best portfolios we come up with and track them to see our hypothetical performance.

From the CME's official web page:

While other industries, such as agriculture and the financial markets, have access to a wide range of financial risk management tools, such tools have not been available to the housing industry – until now. CME is continuing its tradition of innovation with the creation of the first comprehensive products to hedge risk in real estate – CME Housing futures and options. These products provide opportunities for protection in down markets, and extend to the housing industry the same financial tools that previous CME innovations have brought to agriculture and finance. By providing a means of hedging exposure to home prices, they can diffuse the potential impact of sustained declines in housing prices. In addition, they:                                              

• Create a new means of risk transfer to a broad range of investors
• Have the potential for fostering stability in the housing industry
• Provide an innovative way to participate in the real estate market without having to buy and sell properties

                                             

Based on the S&P/Case-Shiller (CS) Home Price Indexes, CME Housing futures and options are cash-settled to a weighted composite index of U.S. real estate prices, as well as to specific markets in 10 major U.S. cities:

                                             

Boston, Miami, New York, San Diego, San Francisco, Washington, D.C., Chicago, Denver, Las Vegas and Los Angeles.

Please post your strategies.

--By Randolph Harrison

Comments

[randolfe]

Tuesday April 25, 2006 Financial Times has an article on page 14: "Hedge around your home" about the CME Housing Futures & Options.

Firstly, the sentiment of the author and quoted economists is universally bearish on real estate. This is a big shift from a year ago.

Another question raised is whether the market can attain enough liquidity to be functional. They are counting on institutional investment, but also expect a lot of retail investors. However, the price of a contract will be $250 * the index. This means that if the index is 100, you must invest a minimum $25,000, but for some markets the index is already well above 100 (for example Los Angeles is over 250, implying about $62,000 per contract).

Finally, only futures will be traded online -- via Globex. Options, which would be much more accessible to individual investors seeking to manage their home-investment risk (hedge), will only be traded in the CME's pits. (Does anyone know if options will be accessible through any widely available broker systems?)

[Peter P]

Since these contracts are traded on CME, we can probably expect that weekly COT data will be available. We will be able to tell the positions of large hedgers and traders versus small speculators.

[randolfe]

I updated the original post with a link to the SFR quotes on the CME. As of writing this the options are not live yet, only the futures.

[DinOR]

Randy H,

I was on hold for some time and finally was able to leave a msg. w/ a specialist. (they were experiencing "high call volume"). The CME web site also mentioned that you can use an introducing broker but I'll let you know what the fee structure looks like. This is a much fun as you can have with your clothes on!

[DinOR]

Randy,

I got the impression that there is a lot of leverage to be had here! There are a lot of option accounts that are started with as little as 5K. The CME guy should get back with me shortly but I think you only put up a fraction of the contract value. At least that's always been my experience.

[randolfe]

DinOR,

Thanks, I'll be interested to find out how the fee structure, leverage and margin rates work out.

[Peter P]

Here are the tentative margin requirements:

http://www.cme.com/html.wrap/wrappedpages/clearing/pbrates/PBISOutrightH.htm?h=2

[Peter P]

Look at this link:

http://www.cme.com/html.wrap/wrappedpages/clearing/pbrates/PBISInterH.htm?h=2

The inter-commodity spread margin for SFR vs. LAV is only 30% of outright (rather low amongst various SFR spreads). Would that be a good way to bet the Bay Area relative to Las Vegas?

[randolfe]

Can you explain more about how that margin works with relation to the minimum performance bond?