Options Mispricing Snapshot – October 29, 2018


UNDERLYINGS:
FILTERS:
TIME:
October 29, 2018 10:00 ET (New York)

SUMMARY

The equity markets are still in stress. All major indices did not manage to recover after being hit hard in the first weeks of October. It seems there are fewer bottom-fishers in the market this time. Meanwhile, historically speaking, an upward bounce is still very probable as all indices are in the oversold territory. 

Options implied volatility is very hight what is reflected in the extreme levels of the Volatility Indices. That makes put options substantially overpriced. On the other side, given the high probability of the upward move, call options are mostly underpriced except for those in the near-term expiration which are not so cheap now and priced more fairly. It seems this is how the options market prices-in the upward bounce in the short term by bidding up this area of volatility surface.

Here is the mispricing summary for the series with 2, 4, and 6 weeks until expiration:

    Puts  Calls
OTM ATM ATM OTM
SPY

2 weeks

Overpriced substantially

Fairly priced

4 weeks

Overpriced substantially

Underpriced 

6 weeks

Overpriced

Underpriced substantially
QQQ 2 weeks

Overpriced substantially

Fairly priced 

4 weeks

Overpriced substantially

Underpriced

6 weeks

Overpriced substantially

Underpriced substantially

IWM 2 weeks Overpriced substantially Fairly priced

4 weeks

Overpriced substantially

Underpriced

6 weeks

Overpriced substantially

Underpriced substantially

All mispricing opportunities are in the direction of the upward move: selling puts (or put spreads) for those who can bear huge volatility and buying calls for more conservative strategies, except for the nearest calls (this area looks overcrowded for now).

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 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 had another rough couple of weeks struggling to bounce up. RSI(14) is still in the oversold area.

VIX is still near its extremes reflecting the huge amount of stress in the markets:

 

SPY Expiration: November 9, 2018 (DTE 10)

Puts are substantially overpriced; calls are priced almost fairly. 

 

SPY Expiration: November 23, 2018 (DTE 19)

Puts are substantially overpriced; calls are underpriced. 

 

SPY Expiration: December 7, 2018 (DTE 29) 

Puts are overpriced; calls are substantially underpriced.

 

QQQ Snapshot

QQQ did not manage to recover and is also in the oversold area:

VXN is also on the extreme levels:

 

QQQ Expiration: November 9, 2018 (DTE 10)

Puts are substantially overpriced; calls are priced fairly.

 

QQQ Expiration: November 23, 2018 (DTE 19)

Puts are substantially overpriced; calls are underpriced. 

 

QQQ Expiration: December 7, 2018 (DTE 29)

Puts are substantially overpriced; calls are substantially underpriced. 

 

IWM snapshot

IWM has continued its downtrend after the timid correction. RSI(14) still demonstrates an extremely oversold condition:

RVX in also on its extremes.

 

IWM Expiration: November 9, 2018 (DTE 10)

Puts are overpriced;  calls are priced fairly. 

 

IWM Expiration: November 23, 2018 (DTE 19)

Puts are substantially overpriced;  calls are underpriced. 

 

IWM Expiration: December 7, 2018 (DTE 29)

Puts are substantially 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.