Options Mispricing Snapshot – June 11, 2018


UNDERLYINGS:
FILTERS:
TIME:
June 11, 2018 10:00 ET (New York)

SUMMARY

All major equity indices seem to have completely recovered after the turbulent spring of this year: QQQ and IWM are near their all-time highs, SPY is trying to do the same. All of them are flirting with overbought levels according to the RSI(14) indicator.

As always observed in this complacent market, implied volatility is relatively low and all Volatility Indices are hovering near their lows since January. Options mispricing disposition is also typical for this market: puts are overpriced (except for IWM ATM puts), calls are priced mostly fairly.

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

    Puts  Calls
OTM ATM ATM OTM
SPY

Near-term

Overpriced substantially

Fairly priced

Farther

expirations

Overpriced substantially

 

Underpriced

Fairly priced

QQQ Near-term

Overpriced substantially

Fairly priced

Farther

expirations

Overpriced

 

Fairly priced
IWM Near-term Fairly priced Underpriced Fairly priced

Farther

expirations

Overpriced

Fairly priced Overpriced

Major opportunities are observed in the overpriced short puts on SPY and QQQ despite the overall low implied volatility. IWM demonstrates mixed picture: OTM puts and ATM calls are overpriced in farther expirations, ATM puts of the near-term series are underpriced.

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 jumped to its highs since March leading RSI(14) closer to the overbought zone.

VIX has settled down and returned to its lows since February:

 

SPY Expiration: June 22, 2018 (DTE 10)

Puts are overpriced; calls are underpriced but not significantly. Market prices are adjusted for the June 15 dividend.

 

SPY Expiration: June 29, 2018 (DTE 15)

Puts are substantially overpriced; calls are underpriced mostly ATM. Market prices are adjusted for the June 15 dividend.

 

SPY Expiration: July 6, 2018 (DTE 19) 

Puts are substantially overpriced; calls are underpriced: Market prices are adjusted for the June 15 dividend

 

SPY Expiration: July 13, 2018 (DTE 24)

Puts are substantially overpriced; calls are underpriced. Market prices are adjusted for the June 15 dividend

 

QQQ Snapshot

QQQ jumped to its all-time highs and has been hovering there for a week trying to break up the resistance area around 175 level; RSI(14) shows slightly overbought conditions:

VXN has been staying near its lows since January this year:

 

QQQ Expiration: June 22, 2018 (DTE 10)

Puts are substantially overpriced; calls are priced fairly. Market prices are adjusted for the June 18 dividend.

 

QQQ Expiration: June 29, 2018 (DTE 15)

Puts are substantially overpriced; calls are priced fairly. Market prices are adjusted for the June 18 dividend.

 

QQQ Expiration: July 6, 2018 (DTE 19)

Puts are overpriced; calls are priced fairly. Market prices are adjusted for the June 18 dividend.

 

QQQ Expiration: July 13, 2018 (DTE 24)

Puts are overpriced mostly OTM; calls are priced fairly. Market prices are adjusted for the June 18 dividend

 

IWM snapshot

IWM has been following its strong uptrend since May 1; RSI(14) demonstrates overbought condition:

RVX has been fluctuating near its lows since January:

IWM now is in a not typical market regime: such a combination of very low volatility (RVX 14.5) and RSI above 70 has been observed not very often in the past. Therefore, the whole analysis below has been done on the basis of the historical dataset with around of 150 days (not 300 as for SPY and QQQ).

IWM Expiration: June 22, 2018 (DTE 10)

OTM puts and calls are priced fairly; ATM puts are slightly underpriced:

 

IWM Expiration: June 29, 2018 (DTE 15)

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

 

IWM Expiration: July 6, 2018 (DTE 19)

OTM puts are overpriced, ATM puts are underpriced;  calls are priced fairly.  Market prices are adjusted for the July 3 dividend.

 

IWM Expiration: July 13, 2018 (DTE 24)

OTM puts are overpriced, ATM puts are priced fairly; calls are overpriced.  Market prices are adjusted for the July 3 dividend.

 

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.