Straddles: Taking Thinking Process to Regions
On Monday I teed up a discussion on one way to frame the volatility/ option premium/ discussion using the CUSX14 contract. Today I want to expand that discussion to include the other three regions with posted options, and to introduce the concept of premium as a percent of strike.
The above table shows outright option quotes for the ATM (at-the-money) futures for the Nov. 2014 series on four contracts. Similar to Monday’s post, I’ve shown suggested levels for bids and offers on straddles that are better than the combination of a put and call bid (or offer). I say “suggested” levels as there is no electronic way to trade the straddles at the inside prices so feel free to contact me at johnhdolan@homepricefutures.com if you’re interested in trading (or countering).
The new notion that I’m introducing here is to take the suggested straddle bid divided by the strike to come up with a straddle bid quoted in percentage terms. I divide that in half to give a sense of the premium for a ATM call (or put). So, for example, the CUS straddle percentage of 4.06% is the 13 point premium for the bid side of the suggested straddle divided by the 160 strike.
Note that the CUS market has the lowest implied percentage premium. This seems to make sense (to me) as the CUS contract is a weighted average basket of ten regions and as such, has the benefits of diversification.
By contrast the LAX and NYM straddle percentages are much higher than the CUS values. This makes sense IF one believes that these areas are going to greater volatility unique to their area (no surprise given the importance of Wall St to NYM and the historical volatility of California home prices) , OR if other regions in the CUS index are have lower volatility, OR one believes that home prices in the two regions are not highly correlated (After all NYM and LAX represent ~49% of the CUS index).
These prices are all mine and my goal in posting them is to start a discussion (or trading) to take this from hypothetical to real. As such I’d appreciate any feedback or counters.
