Options Mispricing Snapshot – July 6, 2018


UNDERLYINGS:
FILTERS:
TIME:
July 6, 2018 10:30 ET (New York)

SUMMARY

Equity markets look calming down after two volatile weeks of trading tensions between the US and trading partners. All major indices are recovering and the markets are calming down driving the volatility indices lower. 

Put options are still overpriced, although not that substantially as in two previous weeks (see June 25 Snapshot); call options are also less underpriced than previously. Calls on IWM are mostly overpriced.

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

    Puts  Calls
OTM ATM ATM OTM
SPY

Near-term

Fairly priced

Fairly priced

Farther

expirations

Overpriced substantially

 

Underpriced

 

QQQ Near-term

Overpriced 

Underpriced

Farther

expirations

Overpriced 

 

Underpriced 

IWM Near-term Fairly priced Overpriced

Farther

expirations

Overpriced substantially

 

 Overpriced  Overpriced

Major opportunities can still be found in overpriced puts and underpriced calls on SPY and QQQ. IWM calls and farther puts can be good candidates for selling.

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 seems to be recovering after two volatile weeks of the trade war between the US and its trading partners, RSI(14) demonstrates neither oversold nor overbought condition.

VIX is also reflecting the calming down markets:

 

SPY Expiration: July 20, 2018 (DTE 11)

Both puts and calls are mispriced just slightly, not statistically significant. 

 

SPY Expiration: July 27, 2018 (DTE 16)

Puts are slightly overpriced; calls are underpriced. 

 

SPY Expiration: August 3, 2018 (DTE 21) 

Puts are substantially overpriced; calls are underpriced. 

 

SPY Expiration: August 10, 2018 (DTE 26)

Puts are overpriced; calls are underpriced, both statistically significant. 

 

QQQ Snapshot

QQQ also recovering from trade tensions turmoil; RSI(14) shows neither overbought nor oversold:

VXN is moving down from its highs of last two weeks:

 

QQQ Expiration: July 20, 2018 (DTE 11)

Puts are overpriced; calls are underpriced.

 

QQQ Expiration: July 27, 2018 (DTE 16)

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

 

QQQ Expiration: August 3, 2018 (DTE 21)

Puts are overpriced; calls are underpriced.

 

QQQ Expiration: August 10, 2018 (DTE 26)

Puts are overpriced; calls are underpriced.

 

IWM snapshot

IWM is moving towards its all-time highs; RSI(14) is getting closer to the overbought condition:

RVX is also reflecting the calming market conditions.

 

IWM Expiration: July 20, 2018 (DTE 11)

Puts are priced fairly; calls are substantially overpriced:

 

IWM Expiration: July 20, 2018 (DTE 16)

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

 

IWM Expiration: August 3, 2018 (DTE 21)

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

 

IWM Expiration: August 10, 2018 (DTE 26)

Both puts and calls are overpriced:

 

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.