Options Mispricing Snapshot – May 21, 2018


UNDERLYINGS:
FILTERS:
TIME:
May 21, 2018 9:45 ET (New York)

SUMMARY

SPY and QQQ have been fluctuating in narrow ranges near their local highs. IWM has broken up the resistance level of its recent highs and continued its short-term uptrend entering the overbought territory. Volatility indices have been staying at their lows since January.

Options on SPY demonstrate a quite significant mispricing: puts are mostly overpriced, especially in farther expirations, while calls are underpriced. Options on QQQ are priced mostly fairly except for the puts in farther expirations. IWM demonstrates a mixed picture for the various moneyness and expirations.

 

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

  Puts  Calls
OTM ATM ATM OTM
SPY

Near-term expirations – Overpriced

Farther expirations – Overpriced substantially

Underpriced Fairly priced
QQQ

Near-term expirations – Fairly priced

Farther expirations – 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 short puts and long calls on SPY. IWM long puts and short calls (both ATM) can be considered as a directional play for those who expect a downward correction.

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 been fluctuating around the recent local highs in the narrow range; RSI(14) is above 60 level demonstrating slightly oversold condition.

VIX stayed near its lows since January this year, reflecting the quiet market conditions:

 

SPY Expiration: June 1, 2018 (DTE 9)

Puts are overpriced, calls are underpriced but both not significantly:

 

SPY Expiration: June 8, 2018 (DTE 14)

Puts are overpriced especially OTM; calls are underpriced:

 

SPY Expiration: June 15, 2018 (DTE 19) 

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

 

SPY Expiration: June 22, 2018 (DTE 24)

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

 

QQQ Snapshot

QQQ has also been staying within the narrow range near the local highs; RSI(14) shows slightly overbought conditions:

VXN has been staying at the lows since January this year:

 

 

QQQ Expiration: June 1, 2018 (DTE 9)

Both puts and calls are priced fairly:

 

QQQ Expiration: June 8, 2018 (DTE 14)

Both puts and calls are priced fairly:

 

QQQ Expiration: June 15, 2018 (DTE 19)

Puts are overpriced mostly OTM; calls are priced fairly:

 

QQQ Expiration: June 22, 2018 (DTE 24)

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

 

IWM snapshot

After the upward breakout, IWM has continued its way up posting its all-time high levels; RSI(14) has entered the overbought area:

RVX has been staying near its lows since January:

 

IWM Expiration: June 1, 2018 (DTE 9)

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

 

IWM Expiration: June 8, 2018 (DTE 14)

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

 

IWM Expiration: June 15, 2018 (DTE 19)

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

 

IWM Expiration: June 22, 2018 (DTE 24)

OTM puts are overpriced significantly, ATM puts are priced fairly; 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.