Options Mispricing Snapshot – October 15, 2018

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October 15, 2018 10:00 ET (New York)

Volatility is back. It has returned the way it happened just a couple of times in the last years, quite abruptly. Equity markets suffered a sharp selloff last week, volatility indices jumped to the levels last seen in April this year.  

All equity indices entered the oversold domain. Historically speaking, the probabilities of bouncing back are much higher than the continuation of the fall as the macroeconomic conditions look solid (although, high price volatility ahead is guaranteed). That expected move and the inflated IV make put options hugely overpriced and calls underpriced across all the underlyings and expirations.

Here is the mispricing summary for the series with 2, 4, and 6 weeks until expiration:

    Puts  Calls
OTM ATM ATM OTM
SPY

2 weeks

Overpriced substantially

Underpriced

4 weeks

Overpriced substantially

Underpriced substantially

6 weeks

Overpriced

Underpriced substantially
QQQ 2 weeks

Overpriced substantially

Underpriced 

4 weeks

Overpriced substantially

Underpriced

6 weeks

Overpriced substantially

Underpriced substantially

IWM 2 weeks Overpriced Underpriced

4 weeks

Overpriced substantially

Underpriced substantially

6 weeks

Overpriced substantially

Underpriced substantially

For those who can withstand huge volatility, overpriced put options can provide good opportunities to sell (with proper tail hedging, solid money management, and position sizing). Despite the inflated implied volatility, calls options are good for buying as the historical distribution indicates the high probability of the upward bounce.

Options Mispricing Snapshot – October 2, 2018

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October 2, 2018 10:00 ET (New York)

SPY and QQQ are fluctuating near their all-time highs while IWM has retreated from the levels reached in the late August. Volatility indices do not demonstrate any stress except for the RVX which reflects the recent pullback of IWM. 

Options on SPY and QQQ demonstrate the typical mispricing in a silent market: puts are overpriced, calls are either underpriced or fairly priced. Meanwhile, IWM put options are in a quite unusual position: despite the oversold condition and elevated implied volatility (RVX), they do not look overpriced. Perhaps, it is the influence of the overall silence in the equity markets. 

Starting from this report, we will be analyzing three expiration series instead of four: with 2, 4, and 6 weeks until expiration. Here is the mispricing summary:

    Puts  Calls
OTM ATM ATM OTM
SPY

2 weeks

Overpriced 

Fairly priced

Underpriced

4 weeks

Overpriced substantially

Overpriced

Underpriced

6 weeks

Overpriced substantially

Underpriced 
QQQ 2 weeks

Fairly priced

Underpriced 

4 weeks

Overpriced

Fairly priced

Fairly priced

6 weeks

Overpriced substantially

Fairly priced

Fairly priced

IWM 2 weeks Fairly priced Underpriced

4 weeks

Fairly priced

Underpriced substantially

6 weeks

Overpriced

Underpriced substantially

Major opportunities can be found in overpriced puts on SPY and QQQ. Calls on SPY and IWM are mostly underpriced what makes them good candidates for buying.

Options Mispricing Snapshot – September 17, 2018

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September 17, 2018 10:00 ET (New York)

Having broken up their trading ranges and all-time highs recently,  all major equity indices do not demonstrate enough steam to move higher and seem to form another trading ranges instead. Volatility indices have been fluctuating around their normal levels of the recent months. 

Options mispricing is back contrasting to the previous snapshot (September 4, 2018) when the most options series were priced fairly. The major changes happened in SPY and QQQ calls which flipped from the fairly priced to the substantial overpriced. The options market seems to estimate the further upward move as having very low probability.

Mispricing summary for the options with two to five weeks until expiration:

    Puts  Calls
OTM ATM ATM OTM
SPY

2-3 weeks

Overpriced 

Fairly priced

Underpriced substantially

4-5 weeks

Overpriced substantially

Overpriced

Underpriced substantially
QQQ 2-3 weeks

Fairly priced

Underpriced substantially

4-5 weeks

Overpriced

Fairly priced

Underpriced

IWM 2-3 weeks Overpriced Fairly priced

Fairly priced

4-5 weeks

Mixed

Fairly priced

Fairly priced

Major opportunities can be found in overpriced puts on SPY, some OTM puts on QQQ and IWM, and calls on SPY and QQQ. Bullish risk reversals on SPY look attractive due to the substantial overpricing of puts combined with the underpricing of calls.

Options Mispricing Snapshot – September 4, 2018

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September 4, 2018 10:00 ET (New York)

All major equity indices have finally broken their ranges of recent months to the upside but do not demonstrate enough steam to move higher. Volatility indices have spent recent weeks near their lows having jumped slightly today as the markets pull back from the all-time highs. 

Options mispricing picture is quite unusual as most options are priced fairly and there is no underpricing left.

Mispricing summary for the options with two to five weeks until expiration:

    Puts  Calls
OTM ATM ATM OTM
SPY

2-3 weeks

Overpriced 

Fairly priced

Fairly priced

4-5 weeks

Overpriced substantially

Overpriced

 Fairly priced
QQQ 2-3 weeks

Fairly priced

Fairly priced

4-5 weeks

Fairly priced

Fairly priced

IWM 2-3 weeks Fairly priced

Overpriced

4-5 weeks

Overpriced substantially

Fairly priced

Overpriced

Some opportunities still exist in the OTM puts on SPY and IWM, especially in the farther expirations. Calls on IWM can be considered as candidates for selling.

Options Mispricing Snapshot – August 20, 2018

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August 20, 2018 10:00 ET (New York)

All major equity indices are hovering near their all-time highs struggling to break to the upside. Volatility indices are near their lows reflecting the silent markets. 

Options mispricing disposition has not changed significantly since the last Snapshot: put options are mostly overpriced while call options are either underpriced or priced fairly – as in a typical silent market condition. 

Mispricing summary for the options with two to five weeks until expiration:

    Puts  Calls
OTM ATM ATM OTM
SPY

Near-term

Overpriced substantially

Overpriced

Underpriced

Fairly priced

Farther

expirations

Overpriced substantially

Overpriced

Underpriced

Fairly priced

QQQ Near-term

Fairly priced

Underpriced substantially

Farther

expirations

Overpriced

Fairly priced

Underpriced substantially

IWM Near-term Overpriced Fairly priced

Fairly priced

Farther

expirations

Overpriced substantially

Fairly priced

Underpriced

Major opportunities can be found in the overpriced puts on SPY and OTM puts on QQQ and IWM.  Call options on QQQ and ATM options on SPY are good candidates for buying.

The information provided on this Website is for informational purposes only and should not be considered as an investment advice. It is not intended to replace consultation with a qualified financial professional. Investing in options involves risk of potential loss exceeding the whole amount of money invested. No one should make any investment decision without first consulting his or her own financial advisor and conducting his or her own research and due diligence.