Housing Futures Go Live Monday
A: The CME will be going live on housing futures Monday with some minor changes to the final structure of trading. Here are some updates for those investors seeking to hedge against real estate holdings in their portfolio if they believe a housing slowdown is going to continue in the most speculative markets.
WHY HEDGE?: Buying puts or selling calls (both tradable options products w/ the same bearish bet) on housing in a particular tradable market, such as Miami, means that you are betting the housing market will fall and will earn a PROFIT if it does! Speculators take these risks to protect their real estate heavy portfolios against a housing market slowdown; as the market and their real estate holdings decline in value their profit on the options contracts owned increase in value limiting the potential loss.
CITIES YOU CAN TRADE ON: Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York, San Diego, San Francisco, Washington D.C.
Here are some changes that I was made aware of by Dave Smith of the CME:
1. Minimum Price Fluctuation (TICK) for Futures Trading - The minimum price fluctuation or "tick" shall be 0.20 index points. Originally, the futures contracts were to trade similar to that of options trading and use 0.10 index points per tick.
2. Trading Hours for Futures - Housing futures will begin trading on SUNDAYS until THURSDAYS at 5PM(CT) and will go on overnight continuing to 2PM(CT) the following day. There will be a 3 hour trading rest before resuming again at 5PM(CT).
3. Trading Hours for Options - Housing Options will trade in the GFCI Pit (Goldman Sachs Commodities Index) beginning MONDAY through FRIDAY from 8AM - 2PM(CT).
**Trading Futures & Options are very risky and complicated. Be sure to discuss this investment strategy with your financial advisor before making any investments of your own. As with any tradable security, you can lose money trading housing futures and you should know that Options trading involves a time element tied to the value of the contract bought (meaning every trading day that goes by you are losing a bit of value in 'time value' as your options contract gets closer to its expiration date)! You can read up on Options Trading Here.
WHAT I WOULD DO: I consider myself a conservative investor after living the front lines of the dot com boom and bust as a NASDAQ equities trader and now the housing boom and, well we don't know what to call it yet, as a real estate agent. So, since this is such a new tradable market I would limit my investing to BUYING PUTS in a highly speculative market such as Miami, until we can see how this whole thing works in the real world.
By BUYING PUT CONTRACTS you are putting a set amount of money into the investment with no chance of losing more than the initial capital. Also, by betting on a highly speculative market such as Miami, where condo development has been overextended, I think all that inventory will at some point lead to lower asking prices. Since you bought PUT CONTRACTS, you bet that the market will fall and will realize a profit.
I WOULD NOT bet against New York City with a brand new options & futures trading market until we learn more about how the CME futures market behave based on actual market conditions. Plus, I strongly believe that NYC Real Estate is NOT AS OVER-VALUED as cities such as Miami, Las Vegas, Phoenix, Boston, & Los Angeles. Manhattan is mostly co-op (75% or so) and limited to speculative activity, an island with limited developable land, experiencing very low vacancy rates and rising rents, and is continuing to grow at an astounding rate.
With futures and options trading you MUST have volatility and sharp short term movements to make a lot of money! So, stick with the most overvalued housing markets I mentioned before.
WHERE TO TRADE HOUSING FUTURES: You can open an account at R.J. O'Brien to trade housing futures when they go live on Monday. R.J. O'Brien is a privately owned Futures Commission Merchant (FCM) and one of the oldest and best known independent futures brokerage firms in the industry. RJO is a founding member of the Chicago Mercantile Exchange
For more information on housing futures please feel free to contact Dave Smith at the Chicago Mercantile Exchange at 312-634-8921.
