Options Mispricing Snapshot – June 25, 2018


UNDERLYINGS:
FILTERS:
TIME:
June 25, 2018 10:00 ET (New York)

SUMMARY

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

Farther

expirations

Overpriced substantially

 

Underpriced substantially

 

QQQ Near-term

Overpriced substantially

Underpriced

Farther

expirations

Overpriced substantially

 

Underpriced substantially

IWM Near-term Fairly priced Underpriced Fairly priced

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. 

SPY snapshot

SPY has dropped today as a reaction to the trade tensions among the US and its trading partners, RSI(14) has shifted closer to the oversold zone.

VIX has reacted accordingly reflecting the elevated demand for the downside insurance:

 

SPY Expiration: July 6, 2018 (DTE 9)

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

 

SPY Expiration: July 13, 2018 (DTE 14)

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

 

SPY Expiration: July 20, 2018 (DTE 19) 

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

 

SPY Expiration: July 27, 2018 (DTE 24)

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

 

QQQ Snapshot

QQQ's reaction to all these trading wars is similar; RSI(14) has moved to its middle levels, neither overbought nor oversold:

VXN has jumped to 20s levels not seen since April this year:

 

QQQ Expiration: July 6, 2018 (DTE 9)

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

 

QQQ Expiration: July 13, 2018 (DTE 14)

Puts are substantially overpriced; calls are slightly underpriced.

 

QQQ Expiration: July 20, 2018 (DTE 19)

Puts are substantially overpriced; calls are substantially underpriced.

 

QQQ Expiration: July 27, 2018 (DTE 24)

Puts are substantially overpriced; calls are substantially underpriced.

 

IWM snapshot

IWM could not stay aside from this selloff also; RSI(14) still demonstrates neither overbought nor oversold condition:

RVX has also jumped to the 18s level reflecting the elevated implied volatility:

 

IWM Expiration: July 6, 2018 (DTE 9)

Puts are priced almost fairly; calls are slightly underpriced:

 

IWM Expiration: July 13, 2018 (DTE 14)

Puts are overpriced but not significantly; calls are underpriced:

 

IWM Expiration: July 20, 2018 (DTE 19)

Puts are overpriced but not significantly; calls are underpriced:

 

IWM Expiration: July 27, 2018 (DTE 24)

Puts are overpriced; calls are underpriced but 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.