Options Mispricing Snapshot – August 7, 2018


UNDERLYINGS:
FILTERS:
TIME:
August 7, 2018 10:00 ET (New York)

SUMMARY

All major equity indices are still at their all-time highs, volatility indices have dropped after the end of the earnings season. 

As in a typical market condition, put options are mostly overpriced while call options are either underpriced or priced fairly. 

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

    Puts  Calls
OTM ATM ATM OTM
SPY

Near-term

Overpriced

Underpriced

Fairly priced

Farther

expirations

Overpriced substantially

Overpriced

Underpriced substantially

QQQ Near-term

Overpriced 

Fairly priced

Fairly priced

Farther

expirations

Overpriced

Fairly priced

IWM Near-term Fairly priced

Fairly priced

Farther

expirations

Overpriced

Fairly priced

Underpriced

Major opportunities can be found in the overpriced puts on SPY and OTM puts on QQQ and IWM.  Call options on SPY with farther expirations 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 is near its all-time highs; RSI(14) has moved closer to the overbought condition.

VIX is at its lows since the beginning of the year reflecting the silent market:

 

SPY Expiration: August 17, 2018 (DTE 9)

Puts are overpriced but not significantly, calls are underpriced. 

 

SPY Expiration: August 24, 2018 (DTE 15)

Puts are substantially overpriced; calls are underpriced. 

 

SPY Expiration: August 31, 2018 (DTE 19) 

Puts are overpriced especially in the OTM area; calls are underpriced. 

 

SPY Expiration: September 7, 2018 (DTE 23)

Puts are substantially overpriced; calls are substantially underpriced. 

 

QQQ Snapshot

QQQ has survived the recent tech stocks turmoil and returned to its all-time highs; RSI(14) has moved closer to the overbought condition:

VXN is at its lows after the volatile earnings period:

 

QQQ Expiration: August 17, 2018 (DTE 9)

Puts are priced fairly; calls are slightly underpriced.

 

QQQ Expiration: August 24, 2018 (DTE 14)

Puts are overpriced; calls are underpriced but not very significantly.

 

QQQ Expiration: August 31, 2018 (DTE 19)

Puts are overpriced; calls are underpriced but not very significantly.

 

QQQ Expiration: September 7, 2018 (DTE 23)

Puts are overpriced; calls are underpriced but not very significantly.

 

IWM snapshot

IWM has been staying in the range of the last months; RSI(14) shows neither overbought nor oversold condition:

RVX is reflecting the silent market conditions.

IWM Expiration: August 17, 2018 (DTE 9)

Both puts and calls are priced fairly:

 

IWM Expiration: August 24, 2018 (DTE 14)

Puts mispricing is not significant; calls are just slightly underpriced:

 

IWM Expiration: August 31, 2018 (DTE 19)

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

 

IWM Expiration: September 7, 2018 (DTE 23)

OTM puts are overpriced; ATM puts are priced fairly; calls are 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.