RESEARCH

Options Mispricing Snapshot – June 25, 2018

All major equity indices reacted sharply today to the trading tensions between the US and trading partners. SPY, QQQ, and IWM have dropped substantially driving their volatility indices higher. Neither of them has still reached oversold levels though.

Usually, in such a panicking market, puts are becoming substantially overpriced, which is currently evident for SPY and QQQ, while IWM put’s reaction has been not so strong yet. Calls are mostly underpriced due to the expected upward move (mean reversion force).

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

		Puts		Calls
		OTM	ATM	ATM	OTM
SPY	Near-term	Overpriced substantially		Underpriced substantially
SPY	Farther expirations	Overpriced substantially		Underpriced substantially
QQQ	Near-term	Overpriced substantially		Underpriced
QQQ	Farther expirations	Overpriced substantially		Underpriced substantially
IWM	Near-term	Fairly priced		Underpriced	Fairly priced
IWM	Farther expirations	Overpriced		Underpriced

Major opportunities are observed in substantially overpriced puts and underpriced calls on SPY and QQQ. IWM options of the near-term series do not demonstrate any meaningful mispricing while puts are overpriced and calls are overpriced in farther expirations.

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.