Options Mispricing Snapshot – September 4, 2018


UNDERLYINGS:
FILTERS:
TIME:
September 4, 2018 10:00 ET (New York)

SUMMARY

All major equity indices have finally broken their ranges of recent months to the upside but do not demonstrate enough steam to move higher. Volatility indices have spent recent weeks near their lows having jumped slightly today as the markets pull back from the all-time highs. 

Options mispricing picture is quite unusual as most options are priced fairly and there is no underpricing left.

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

Fairly priced

4-5 weeks

Overpriced substantially

Overpriced

 Fairly priced
QQQ 2-3 weeks

Fairly priced

Fairly priced

4-5 weeks

Fairly priced

Fairly priced

IWM 2-3 weeks Fairly priced

Overpriced

4-5 weeks

Overpriced substantially

Fairly priced

Overpriced

Some opportunities still exist in the OTM puts on SPY and IWM, especially in the farther expirations. Calls on IWM can be considered as candidates for selling.

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 broken the previous all-time highs reached in January this year but bounced back slightly; RSI(14) is in neither oversold nor overbought area.

VIX remains low while having moved to the upside in recent days:

 

SPY Expiration: September 14, 2018 (DTE 9)

Both puts and calls are priced almost fairly. 

 

SPY Expiration: September 21, 2018 (DTE 14)

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

 

SPY Expiration: September 28, 2018 (DTE 19) 

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

 

SPY Expiration: October 5, 2018 (DTE 24)

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

 

QQQ Snapshot

QQQ has also broken the range formed since the mid of July demonstrating some pullback today; RSI(14) has left the overbought zone reached in the recent days:

VXN has jumped somewhat reflecting today's micro-correction but still remains in the low vol zone:

 

QQQ Expiration: September 14, 2018 (DTE 9)

Both puts and calls are priced fairly.

 

QQQ Expiration: September 21, 2018 (DTE 14)

Puts are priced fairly; calls are slightly underpriced.

 

QQQ Expiration: September 28, 2018 (DTE 19)

Puts are overpriced, calls are underpriced but not significantly.  Market prices are adjusted for the September 24 dividend ($0.308).

 

QQQ Expiration: October 5, 2018 (DTE 24)

OTM puts are overpriced; mispricing of ATM puts and calls is not significant.  Market prices are adjusted for the September 24 dividend ($0.308).

 

IWM snapshot

IWM has finally broken the narrow range formed since the beginning of June; RSI(14) demonstrates neither overbought nor oversold conditions:

RVX is reflecting the silent market conditions overall.

 

IWM Expiration: September 14, 2018 (DTE 9)

Puts are priced fairly; calls are overpriced:

 

IWM Expiration: September 21, 2018 (DTE 14)

Puts mispricing is not significant; calls are overpriced:

 

IWM Expiration: September 28, 2018 (DTE 19)

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

 

IWM Expiration: October 5, 2018 (DTE 24)

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