UNDERLYINGS:
FILTERS:
TIME:
April 30, 2018 10:30 ET (New York)

SUMMARY

All three indices finished the last week almost unchanged, again.  Overall, they remain almost in the middle of the range formed in recent months. RSI(14) is still hovering around 50 mark showing neither oversold nor overbought condition.

Meanwhile, the option pricing picture has changed somewhat. Especially in the near-term expirations where prices of put options have moved closer to their Fair Values and made them priced almost fairly (for SPY and IWM).

Overall, options market seems to calm down and is coming to normal. The same force has driven the call prices down making them mostly underpriced.

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

  Puts  Calls
OTM ATM ATM OTM
SPY

Near-term expirations – Fairly priced

Farther expirations – Overpriced substantially

Fairly priced Fairly priced
QQQ Overpriced substantially Overpriced Underpriced substantially Underpriced
IWM

Near-term expirations – Fairly priced

Farther expirations – Overpriced

Underpriced Underpriced

 

Interesting opportunities remain in QQQ where puts are still substantially overpriced and calls are underpriced (bullish risk reversal strategy). Among SPY options, the only opportunity remains is selling puts with farther expirations (20-25 trading DTE). IWM has just opened an opportunity for calls buying.

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 finished the previous week almost unchanged again; RSI(14) level of around 50 shows no oversold condition.

VIX is close to its lows since February.

Expiration: May 11, 2018 (DTE 10)

Both puts and calls are priced almost fairly:

 

Expiration: May 18, 2018 (DTE 15)

Puts are overpriced but not substantial; the mispricing of calls is not statistically significant:

 

Expiration: May 25, 2018 (DTE 20)

Puts are overpriced, especially OTM; calls are priced fairly:

 

Expiration: June 1, 2018 (DTE 24)

Puts are substantially overpriced; calls are underpriced but not statistically significant:

 

The Best One-Leg Strategy

Short Put PL metrics for June 1 expiration:

 

QQQ Snapshot

As with SPY,  QQQ has also slightly changed for the week. RSI(14) level of around 50 shows there is neither oversold nor overbought conditions.

VXN also has not changed significantly for the week:

 

 

Expiration: May 11, 2018 (DTE 10)

Put prices have moved closer to their average historical prices (green and red lines coincide) and remain substantially overpriced; calls are underpriced:

 

Expiration: May 18, 2018 (DTE 15)

Puts are overpriced; calls are substantially underpriced:

 

Expiration: May 25, 2018 (DTE 20)

Puts are overpriced; calls are underpriced  - all very significantly:

 

Expiration: June 1, 2018 (DTE 24)

Puts are overpriced; calls are underpriced  - all very significantly:

 

The Best One-Leg Strategy:

Short Put PL metrics for May 25 expiration:

 

Long Call PL metrics for May 25 expiration:

 

IWM snapshot

IWM has also slightly changed for the week. RSI(14) demonstrates neither oversold nor overbought condition:

RVX is testing its lows for the last months:

 

Expiration: May 11, 2018 (DTE 15)

Puts are priced almost fairly; calls are underpriced:

 

Expiration: May 18, 2018 (DTE 15)

Puts mispricing is not statistically significant; calls are underpriced:

 

Expiration: May 25, 2018 (DTE 20)

Puts are overpriced mostly OTM; calls are underpriced:

 

Expiration: June 1, 2018 (DTE 24)

Puts are overpriced mostly OTM; calls are fairly priced:

 

The Best One-Leg Strategy:

Short Put PL metrics for June 1 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.