Options Mispricing Snapshot – October 2, 2018


UNDERLYINGS:
FILTERS:
TIME:
October 2, 2018 10:00 ET (New York)

SUMMARY

SPY and QQQ are fluctuating near their all-time highs while IWM has retreated from the levels reached in the late August. Volatility indices do not demonstrate any stress except for the RVX which reflects the recent pullback of IWM. 

Options on SPY and QQQ demonstrate the typical mispricing in a silent market: puts are overpriced, calls are either underpriced or fairly priced. Meanwhile, IWM put options are in a quite unusual position: despite the oversold condition and elevated implied volatility (RVX), they do not look overpriced. Perhaps, it is the influence of the overall silence in the equity markets. 

Starting from this report, we will be analyzing three expiration series instead of four: with 2, 4, and 6 weeks until expiration. Here is the mispricing summary:

    Puts  Calls
OTM ATM ATM OTM
SPY

2 weeks

Overpriced 

Fairly priced

Underpriced

4 weeks

Overpriced substantially

Overpriced

Underpriced

6 weeks

Overpriced substantially

Underpriced 
QQQ 2 weeks

Fairly priced

Underpriced 

4 weeks

Overpriced

Fairly priced

Fairly priced

6 weeks

Overpriced substantially

Fairly priced

Fairly priced

IWM 2 weeks Fairly priced Underpriced

4 weeks

Fairly priced

Underpriced substantially

6 weeks

Overpriced

Underpriced substantially

Major opportunities can be found in overpriced puts on SPY and QQQ. Calls on SPY and IWM are mostly underpriced what makes them good candidates for buying.

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.

For each underlying, we select expirations on 2, 4, and 6 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 hovering near its all-time high; RSI(14) is in neither oversold nor overbought area.

VIX is near its lows of this year:

 

SPY Expiration: October 12, 2018 (DTE 9)

OTM puts are overpriced; ATM puts are priced fairly; calls are underpriced. 

 

SPY Expiration: October 26, 2018 (DTE 19)

OTM puts are substantially overpriced; ATM puts are overpriced; calls are underpriced.

 

SPY Expiration: November 9, 2018 (DTE 39) 

Puts are substantially overpriced; calls are underpriced.

 

QQQ Snapshot

QQQ has once again reached its all-time high level; RSI(14) shows neither oversold nor overbought condition:

VXN is placed in the middle of the last months' range:

 

QQQ Expiration: October 12, 2018 (DTE 9)

Puts are priced fairly; calls are slightly underpriced.

 

QQQ Expiration: October 26, 2018 (DTE 19)

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

 

QQQ Expiration: November 9, 2018 (DTE 39)

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

 

IWM snapshot

IWM has retreated from its August highs; RSI(14) has mover to the oversold area:

RVX is somewhat elevated reflecting the recent decline in IWM.

 

IWM Expiration: October 12, 2018 (DTE 9)

Puts are priced fairly;  calls are underpriced. 

 

IWM Expiration: October 26, 2018 (DTE 19)

Puts are priced fairly; calls are substantially overpriced. 

 

IWM Expiration: November 9, 2018 (DTE 39)

Puts are overpriced; calls are substantially underpriced.

 

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.