Options Mispricing Snapshot – May 29, 2018


UNDERLYINGS:
FILTERS:
TIME:
May 29, 2018 9:45 ET (New York)

SUMMARY

All three indices little changed last week staying in the narrow ranges near their local (SPY and QQQ) or all-time (IWM) highs. Today’s political turmoil in Italy has moved SPY slightly lower, provoked some spike in VIX and VXN but has not led to any meaningful reaction in QQQ and IWM.

The mispricing disposition for options on SPY and QQQ has not changed since last week. Options on SPY with expiration 4-5 weeks remain in a quite significant mispricing mode: puts are still substantially overpriced while calls are underpriced. Options on QQQ are priced mostly fairly except for the puts with farther expirations. IWM puts are overpriced in OTM and fairly priced ATM; calls are substantially overpriced in all expirations.

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

    Puts  Calls
OTM ATM ATM OTM
SPY

Near-term

Fairly priced

Fairly priced

Farther

expirations

Overpriced substantially

Overpriced

Underpriced

QQQ Near-term

 Fairly priced

Fairly priced

Farther

expirations

Overpriced

Fairly priced

Fairly priced
IWM Near-term Fairly priced Fairly priced Overpriced substantially

Farther

expirations

Overpriced

Fairly priced Overpriced substantially

Major opportunities remain mostly in short puts and long calls on SPY. Overpriced IWM calls, especially ATM, can be candidates for selling, including in a covered call strategy.

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 spent last week in a narrow range but is declining somewhat today as a reaction to the political turmoil in Italy; RSI(14) has returned closer to 50 level demonstrating neither oversold nor overbought condition.

VIX has been hovering around its lows since January this year and jumped today as a consequence of the market drop:

 

SPY Expiration: June 8, 2018 (DTE 9)

Puts are fairly priced; calls are underpriced but not significantly:

 

SPY Expiration: June 15, 2018 (DTE 14)

Puts are overpriced in the OTM area; ATM puts and calls are fairly priced. Market prices are adjusted for the June 15 dividend.

 

SPY Expiration: June 22, 2018 (DTE 19) 

Puts are overpriced, especially OTM; calls are underpriced: Market prices are adjusted for the June 15 dividend

 

SPY Expiration: June 29, 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 fluctuating within the narrow range near the local highs, did not respond to the Italian events today; RSI(14) shows slightly overbought conditions:

VXN has been staying at the lows since January this year, jumped today to the upper bound of the recent range (16-18):

 

 

QQQ Expiration: June 8, 2018 (DTE 9)

Both puts and calls are priced fairly:

 

QQQ Expiration: June 15, 2018 (DTE 14)

Both puts and calls are priced fairly:

 

QQQ Expiration: June 22, 2018 (DTE 19)

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

 

QQQ Expiration: June 29, 2018 (DTE 24)

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

 

IWM snapshot

IWM has tried to test the support line on 160 today but bounced back; RSI(14) demonstrates slightly overbought condition:

RVX has been staying near its lows since January not reacting to the Italian events today:

 

IWM Expiration: June 8, 2018 (DTE 9)

Puts are priced fairly; calls are substantially overpriced:

 

IWM Expiration: June 15, 2018 (DTE 14)

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

 

IWM Expiration: June 22, 2018 (DTE 19)

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

 

IWM Expiration: June 29, 2018 (DTE 24)

OTM puts are overpriced, ATM puts are priced fairly; calls are substantially 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.