What you describe sounds exactly like what happened when they first started trading options on future contracts.
The option premiums were initally so high, it was the option sellers who cleaned up, not the buyers.
I anticipate this may happen on the Merc as well. Thus, if you have an opinion on market direction, it would be better to write bull or bear spreads (and maybe naked options) as opposed to buying puts or calls.
In April 2006, the Chicago Mercantile Exchange is going to start trading housing price futures and options for 10 major U.S. cities.
The cities include Los Angeles, San Diego, San Francisco, New York, Boston, Washington DC, Chicago, Las Vegas, Miami, and Denver.
Because it takes a buyer and a seller to make a market, who do you think is going to be trading (or hedging themselves) with this new financial product?
Please give me your ideas about who will be on each side of a trade.
I don’t know, but having worked for 7.5 years on the floor of the Chicago Board of Trade’s grain room, I can tell you that traders will be artifically inflating the prices. (Just look at how fuel prices spiked with all the trading in futures in NY.) I think its going to be a rotten deal for the middle class - and I’ve seen first hand these guys jacking prices up, just to help their buddies in the trading pit make a buck, or to cover their trading mistakes and often to kiss the asses of the “market makers”, the guys holding the “decks” or stacks of orders.
On a lighter note, try to rent that old movie “Gaily, Gaily” with Beau Bridges, George Kennedy, Brian Keith and a young Margot Kidder. The scene where the farmers bust into the Chicago Board of Trade and start beating the p*** out of the grain traders was hilarious.