Options Mispricing Snapshot – July 23, 2018


UNDERLYINGS:
FILTERS:
TIME:
July 23, 2018 10:00 ET (New York)

SUMMARY

All major equity indices are fluctuating near their all-time highs struggling to break them to the upside. Volatility indices look slightly elevated for such a silent market, probably due to the earnings season. 

Put options are mostly overpriced, as usual; call options are either underpriced or priced fairly. Comparing to the previous snapshots, major part on options series are 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

Farther

expirations

Overpriced substantially

 

Underpriced substantially

 

QQQ Near-term

Overpriced 

Fairly priced

Farther

expirations

Overpriced

Fairly priced

Fairly priced

IWM Near-term Overpriced  Fairly priced

Fairly priced

Farther

expirations

Overpriced 

 

Fairly priced

Fairly priced

Major opportunities can be found in overpriced puts on SPY and OTM puts on QQQ and IWM.  Call 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 hovering around its highs since February this year; RSI(14) demonstrates neither oversold nor overbought condition.

VIX looks slightly elevated for such a silent market reflecting the ongoing earnings season:

 

SPY Expiration: August 3, 2018 (DTE 10)

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

 

SPY Expiration: August 10, 2018 (DTE 15)

Puts are overpriced; calls are underpriced. 

 

SPY Expiration: August 17, 2018 (DTE 20) 

Puts are substantially overpriced; calls are underpriced. 

 

SPY Expiration: August 24, 2018 (DTE 25)

Puts are substantially overpriced; calls are underpriced. 

 

QQQ Snapshot

QQQ has been fluctuating near the all-time highs; RSI(14) shows neither overbought nor oversold:

VXN is slightly elevated due to the earnings season:

 

QQQ Expiration: August 3, 2018 (DTE 10)

Puts are overpriced, calls are underpriced - both not very significant.

 

QQQ Expiration: August 10, 2018 (DTE 15)

Puts are overpriced, calls are underpriced - both not very significant.

 

QQQ Expiration: August 17, 2018 (DTE 20)

OTM puts are substantially overpriced; mispricing of ATM puts and calls is not significant.

 

QQQ Expiration: August 24, 2018 (DTE 25)

OTM puts are substantially overpriced; mispricing of ATM puts and calls is not significant.

 

IWM snapshot

IWM has tried to break 170 level to the upside but unsuccessfully; RSI(14) shows neither overbought nor oversold condition:

RVX is reflecting the silent market conditions.

IWM Expiration: August 3, 2018 (DTE 10)

Both puts and calls are priced fairly:

 

IWM Expiration: August 10, 2018 (DTE 156)

OTM puts are overpriced, ATM puts are priced fairly; calls are slightly overpriced:

 

IWM Expiration: August 17, 2018 (DTE 20)

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

 

IWM Expiration: August 24, 2018 (DTE 25)

Puts are overpriced and calls are underpriced - both not significantly:

 

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.