UNDERLYINGS:
FILTERS:
TIME:
April 16, 2018 11:50 ET (New York)

SUMMARY

All major equity indices have recovered from the recent correction and bounced back from their support levels. Neither oversold nor overbought condition is observed as RSI(14) is hovering around 50 level. Volatility gets back to normal, the markets are overall normalizing. 

Option market priced have moved closer to their Fair Values (puts are less overpriced, calls are valued mostly fairly) except for QQQ where mispricing remains substantial.

Mispricing summary for options with 2-5 weeks to expiration:

  Puts  Calls
OTM ATM ATM OTM
SPY Overpriced Fairly priced Fairly priced Fairly priced
QQQ Overpriced substantially Overpriced substantially Underpriced substantially Underpriced
IWM Overpriced substantially  Overpriced Fairly priced Fairly priced

 

Market regime Filtering

To make our estimation more reliable, we filter the historical data and select from the past only those dates when the market resembled the current condition (read more here). We use three filters:

  • Long-term macroeconomic regime. We filter out the recessionary environment (or looming recession) with The Conference Board Leading Economic Index® (LEI) and select all dates when its 6-month rate-of-change was above -2%.
  • Volatility regime. We use VIX, VXN, and RVX indices as volatility filters for SPY, QQQ, and IWM respectively.
  • Short-term swing regime. We use Relative Strength Index (RSI) with 14-days interval - RSI(14)

We apply auto filtering for Volatility index and RSI selecting 300 days in history with the shortest Euclidean distance to their current values.

For each underlying, we select expirations on a range of 2-5 weeks. We present mispricing charts for each expiration and basic PL metrics for the best one-leg strategy  (buying or selling put or call) measured by the Expected profit (annualized).

SPY snapshot

 SPY has recovered almost one-third of the recent 10% correction. RSI(14) level of around 50 shows no oversold condition anymore.

 

 

Expiration: Apr 27, 2018 (DTE 10)

Puts are overpriced, calls overpricing is not statistically significant:

SPY options mispricing. Expiration: Apr 27, 2018

 

Expiration: May 4, 2018 (DTE 15)

OTM Puts are overpriced, the mispricing of ATM Puts and Calls is not statistically significant:

 

Expiration: May 11, 2018 (DTE 20)

OTM Puts are overpriced, the mispricing of ATM Puts and Calls is not statistically significant:

SPY options mispricing. Expiration: May 11, 2018

 

Expiration: May 18, 2018 (DTE 25)

OTM Puts are overpriced, the mispricing of ATM Puts and Calls is not statistically significant:

 

The Best One-Leg Strategy

Short Put PL metrics for May 11 expiration:

 

QQQ Snapshot

As with SPY,  QQQ has also recovered after the Feb-Mar selloff. RSI(14) level of around 50 shows there is no oversold condition anymore.

 

 

Expiration: Apr 27, 2018 (DTE 10)

Puts are substantially overpriced, calls are underpriced but not very significant:

 

Expiration: May 4, 2018 (DTE 15)

Puts are overpriced, calls are underpriced  - both very significant:

 

Expiration: May 11, 2018 (DTE 20)

Puts are overpriced, calls are underpriced  - both very significant:

 

Expiration: May 18, 2018 (DTE 25)

Puts are overpriced, calls are underpriced  - both very significant:

 

The Best One-Leg Strategy:

Short Put PL metrics for May 4 expiration:

 

Long Call PL metrics for May 11 expiration:

 

IWM snapshot

IWM has recovered more than a half of its recent correction. RSI(14) demonstrates neither oversold nor overbought condition:

 

 

Expiration: April 27, 2018 (DTE 10)

Puts are overpriced mostly OTM, calls are priced almost fairly:

 

Expiration: May 4, 2018 (DTE 15)

Puts are overpriced mostly OTM, calls are priced almost fairly:

 

Expiration: May 11, 2018 (DTE 20)

Puts are overpriced mostly OTM, calls are underpriced but not statistically significant:

 

Expiration: May 18, 2018 (DTE 25)

Puts are overpriced, calls are priced almost fairly:

 

The Best One-Leg Strategy:

Short Put PL metrics for May 4 expiration:

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.