Options Mispricing Snapshot – September 17, 2018


UNDERLYINGS:
FILTERS:
TIME:
September 17, 2018 10:00 ET (New York)

SUMMARY

Having broken up their trading ranges and all-time highs recently,  all major equity indices do not demonstrate enough steam to move higher and seem to form another trading ranges instead. Volatility indices have been fluctuating around their normal levels of the recent months. 

Options mispricing is back contrasting to the previous snapshot (September 4, 2018) when the most options series were priced fairly. The major changes happened in SPY and QQQ calls which flipped from the fairly priced to the substantial overpriced. The options market seems to estimate the further upward move as having very low probability.

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

    Puts  Calls
OTM ATM ATM OTM
SPY

2-3 weeks

Overpriced 

Fairly priced

Underpriced substantially

4-5 weeks

Overpriced substantially

Overpriced

Underpriced substantially
QQQ 2-3 weeks

Fairly priced

Underpriced substantially

4-5 weeks

Overpriced

Fairly priced

Underpriced

IWM 2-3 weeks Overpriced Fairly priced

Fairly priced

4-5 weeks

Mixed

Fairly priced

Fairly priced

Major opportunities can be found in overpriced puts on SPY, some OTM puts on QQQ and IWM, and calls on SPY and QQQ. Bullish risk reversals on SPY look attractive due to the substantial overpricing of puts combined with the underpricing of calls.

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 approached its all-time high again after a small correction in the last week; RSI(14) is in neither oversold nor overbought area.

VIX got back to the lows of the recent months reflecting the silent market:

 

SPY Expiration: September 28, 2018 (DTE 10)

Puts are priced fairly; calls are underpriced. Market prices are adjusted for the September 21 dividend ($1.23).

 

SPY Expiration: October 5, 2018 (DTE 15)

OTM puts are overpriced; ATM puts are priced fairly; calls are substantially underpriced. Market prices are adjusted for the September 21 dividend ($1.23).

 

SPY Expiration: October 12, 2018 (DTE 20) 

OTM puts are substantially overpriced; ATM puts are overpriced not significantly; calls are substantially underpriced.   Market prices are adjusted for the September 21 dividend ($1.23).

 

SPY Expiration: October 19, 2018 (DTE 25)

Puts are substantially overpriced; calls are substantially underpriced. Market prices are adjusted for the September 21 dividend ($1.23).

 

QQQ Snapshot

QQQ pulled back after the reaching its all-time high and looks like forming a new trading range; RSI(14) is fluctuating near the middle line of 50:

VXN demonstrates the silent market conditions overall:

 

QQQ Expiration: September 28, 2018 (DTE 10)

Puts are priced fairly; calls are substantially underpriced. Market prices are adjusted for the September 24 dividend ($0.308).

 

QQQ Expiration: October 5, 2018 (DTE 15)

Puts are priced fairly; calls are substantially underpriced. Market prices are adjusted for the September 24 dividend ($0.308).

 

QQQ Expiration: October 12, 2018 (DTE 20)

OTM puts are overpriced; ATM puts are priced fairly; calls are substantially underpriced.  Market prices are adjusted for the September 24 dividend ($0.308).

 

QQQ Expiration: October 19, 2018 (DTE 25)

OTM puts are overpriced; ATM puts are priced fairly; calls are underpriced.  Market prices are adjusted for the September 24 dividend ($0.308).

 

IWM snapshot

IWM has been hovering near the all-time high in the very narrow range; RSI(14) demonstrates neither overbought nor oversold conditions:

RVX is near its lows of the recent months reflecting the silent market conditions.

 

IWM Expiration: September 28, 2018 (DTE 10)

OTM puts are overpriced; ATM puts mispricing is not significant; calls are priced fairly. Market prices are adjusted for the September 26 dividend ($0.419).

 

IWM Expiration: October 5, 2018 (DTE 15)

OTM puts are overpriced; mispricing of calls and ATM puts is not significant. Market prices are adjusted for the September 26 dividend ($0.419).

 

IWM Expiration: October 12, 2018 (DTE 20)

OTM puts are substantially overpriced; ATM puts are priced fairly; calls are underpriced.  Market prices are adjusted for the September 26 dividend ($0.419).

 

IWM Expiration: October 19, 2018 (DTE 25)

Both puts and calls are priced fairly. Market prices are adjusted for the September 26 dividend ($0.419).

 

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.