UNDERLYINGS:
FILTERS:
TIME:
May 14, 2018 10:00 ET (New York)

SUMMARY

All three equity indices have jumped to their highs of the recent months entering the slightly oversold territory. Volatility indices are at their lows since January.

SPY and QQQ return statistics indicate that even in an oversold regime they both tend to either move higher or stay on the achieved levels. Implied volatility is usually low but puts are still overpriced due to the not that big probability of a significant move downward. Meanwhile, IWM has another character in this regime since it is more susceptible to the negative news and usually more ready to correct down. Combination of such behavior with low option prices makes IWM near-the-money puts underpriced.

Call options are priced fairly except for ATM calls on IWM.

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

  Puts  Calls
OTM ATM ATM OTM
SPY

Near-term expirations – Fairly priced

Farther expirations – Overpriced substantially

Fairly priced Fairly priced
QQQ Overpriced Overpriced Fairly priced Fairly priced
IWM

Near-term expirations – Fairly priced

Farther expirations – Overpriced

Near-term expirations – Underpriced

Farther expirations – Fairly priced

Overpriced Fairly priced

Major opportunities are observed mostly in puts: SPY and QQQ with 4-5 weeks till expiration. IWM ATM near-term long puts can be considered as a directional play with downward move expectation.

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)

We apply auto filtering for Volatility index and RSI selecting 300 days in history with the shortest Euclidean distance to their current values.

For each underlying, we select expirations on a range of 2-5 weeks. We present mispricing charts for each expiration and basic PL metrics for the best one-leg strategy  (buying or selling put or call) measured by the Expected profit (annualized).

SPY snapshot

 SPY has broken up its 260-270 range; RSI(14) is above 60 level demonstrating slightly oversold condition.

VIX has broken to the downside demonstrating the lowest level since January this year:

 

SPY Expiration: May 25, 2018 (DTE 10)

Puts are overpriced, calls are underpriced but not significantly:

 

SPY Expiration: June 1, 2018 (DTE 14)

Puts are overpriced mostly OTM; calls are priced fairly:

 

SPY Expiration: June 8, 2018 (DTE 19)

Puts are substantially overpriced, especially OTM; calls are priced fairly:

 

SPY Expiration: June 15, 2018 (DTE 24)

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

 

One-Leg Strategy with maximum overpricing (annualized)

Short Put PL metrics for June 15 expiration:

 

QQQ Snapshot

QQQ has also broken the recent range to the upside moving closer to the all-time highs; RSI(14) shows slightly overprices conditions:

VXN continued its short-term downtrend posting the lowest level since January this year::

 

 

QQQ Expiration: May 25, 2018 (DTE 10)

Puts are overpriced; calls are priced fairly:

 

QQQ Expiration: June 1, 2018 (DTE 14)

Puts are overpriced; calls are priced fairly:

 

QQQ Expiration: June 8, 2018 (DTE 19)

Puts are overpriced; calls are priced fairly:

 

QQQ Expiration: June 15, 2018 (DTE 24)

Puts are overpriced; calls are priced fairly:

 

One-Leg Strategy with maximum overpricing (annualized)

Short Put PL metrics for June 1 expiration:

 

IWM snapshot

IWM has jumped to its all-time high levels; RSI(14) demonstrates slightly oversold condition:

RVX has moved to its January lows:

 

IWM Expiration: May 25, 2018 (DTE 10)

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

 

IWM Expiration: June 1, 2018 (DTE 14)

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

 

IWM Expiration: June 8, 2018 (DTE 19)

OTM puts are overpriced, ATM puts are priced fairly; calls are overpriced but not significantly:

 

IWM Expiration: June 15, 2018 (DTE 24)

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

 

One-Leg Strategy with maximum overpricing (annualized)

Short Put PL metrics for June 15 expiration:

Short Call PL metrics for June 15 expiration:

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.