The Big(ger) Short: The Case for April 2025 Puts on iShares CMBS ETF
Everyone on this sub has seen The Big Short; its practically a prerequisite to trading market derivatives (and losing lots of money doing it). I think its safe to say that everyone has that fantasy that they get in on the ground floor of a trend that no one else could have seen coming. So I'm here to offer my explanation and pitch for why CMBS $44 4/17 puts are going to print money in a matter of time
I think a lot of people are vaguely aware that there has been some trouble in the commercial real estate market since remote work took off during COVID, but I think few people are aware of just how bad the issue has stayed. Despite some return to office, absurd markdown rates have become Extremely common.
Now how does this tie into CMBS? Well - CMBS works exactly the way that mortgage backed securities did in 2008 - a tranche of mortgages is packaged together, and ideally, that CMBS becomes worth more over time as the loan is paid back. Herein lies the problem - when these buildings are being sold at pennies on the dollar, even up into the present day, this presents a serious distress problem. And herein lies in my evidence that we are on the cusp of an epic collapse in the CMBS market:
Office CMBS Delinquency Rate
This graph, sourced by Trepp and published by Wolf Street Yesterday (Nov. 4) is currently showing that there is an epic blowup happening in the Office CMBS delinquency rate. Mind you, this is PRE RECESSION. The S&P is up gambling numbers (~23%) this year, and the delinquency rate is still skyrocketing as of yesterday. If there is any impending weakness in the economy - or even pullback to normalcy after an insane year of bull run - this delinquency rate is likely to completely blow by historical volatility markers.
For the play - I have 18 contracts of 4/18 CMBS $44. The premiums are pretty low because the historical volatility is almost nonexistent, but I think given this evidence there is a chance that it could greatly surpass these markers - and be an extremely profitable play.
Is this by any means guaranteed? Absolutely not, the market could continue to rip ass into the sunset and the commercial real estate market pulls out with zero problems. But given the current trends, and the fact that the current bull market cannot last forever, I think this is a serious play with some potential for some serious upside. Plus, who doesn't want to be the one who called it?
Wolf street source: https://wolfstreet.com/2024/11/04/office-cmbs-delinquency-rate-spikes-to-9-4-highest-since-worst-months-after-the-financial-crisis/
Buildings still selling at discount example: https://www.nytimes.com/2024/08/01/nyregion/manhattan-office-building-auction.html