Options Mispricing Snapshot – August 20, 2018


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

SUMMARY

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.

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)

For SPY and QQQ, we apply auto filtering for Volatility index and RSI selecting 300 days in history with the shortest Euclidean distance to their current values. For IWM, we use manual filtering since the current regime is not typical due to the relatively low implied volatility (RVX index).

For each underlying, we select expirations on a range of 2-5 weeks and present options Fair Values and Market Prices, both historical (red line) and current real-time (green line). The market prices of these two types can sometimes diverge from each other if the current market condition (volatility surface) differs from its average state in the history. 

SPY snapshot

SPY has been staying near its all-time highs; RSI(14) is still neither in the oversold nor overbought area.

VIX reflects the overall silent market while it has had some spikes in the last week on the Turkish crisis:

 

SPY Expiration: August 31, 2018 (DTE 10)

Puts are overpriced mostly in the OTM area, calls are underpriced. 

 

SPY Expiration: September 7, 2018 (DTE 14)

Puts are substantially overpriced; calls are underpriced. 

 

SPY Expiration: September 14, 2018 (DTE 19) 

Puts are substantially overpriced; calls are underpriced. 

 

SPY Expiration: September 21, 2018 (DTE 24)

Puts are substantially overpriced; calls are underpriced but not substantially. Market prices are adjusted for the September 21 dividend ($1.23).

 

QQQ Snapshot

QQQ has bounced from its all-time high level of 182 having no steam to break it to the upside; RSI(14) is around 50 reflecting neither oversold nor overbought conditions:

VXN is in the middle of the range of the last several months:

 

QQQ Expiration: August 31, 2018 (DTE 10)

Puts are priced fairly; calls are substantially underpriced.

 

QQQ Expiration: September 7, 2018 (DTE 14)

Puts are priced fairly; calls are substantially underpriced.

 

QQQ Expiration: September 14, 2018 (DTE 19)

Puts are slightly overpriced; calls are substantially underpriced.

 

QQQ Expiration: September 21, 2018 (DTE 23)

Puts are overpriced; calls are significantly underpriced.

 

IWM snapshot

IWM is once again trying to break the resistance near 169 level; RSI(14) shows neither overbought nor oversold condition:

RVX is reflecting the silent market conditions.

 

IWM Expiration: August 31, 2018 (DTE 10)

OTM puts are overpriced; ATM puts and calls are priced fairly:

 

IWM Expiration: September 7, 2018 (DTE 14)

OTM puts are overpriced; ATM puts and calls are priced fairly:

 

IWM Expiration: September 14, 2018 (DTE 19)

OTM puts are substantially overpriced; ATM puts are priced fairly; calls are slightly underpriced:

 

IWM Expiration: September 21, 2018 (DTE 23)

OTM puts are substantially overpriced; ATM puts overpricing is not significant; calls are slightly underpriced:

 

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.