All major equity indices reacted sharply today to the trading tensions between the US and trading partners. SPY, QQQ, and IWM have dropped substantially driving their volatility indices higher. Neither of them has still reached oversold levels though.
Usually, in such a panicking market, puts are becoming substantially overpriced, which is currently evident for SPY and QQQ, while IWM put’s reaction has been not so strong yet. Calls are mostly underpriced due to the expected upward move (mean reversion force).
Mispricing summary for the options with two to five weeks until expiration:
| Puts | Calls | ||||
| OTM | ATM | ATM | OTM | ||
| SPY |
Near-term |
Overpriced substantially |
Underpriced substantially |
||
|
Farther expirations |
Overpriced substantially
|
Underpriced substantially
|
|||
| QQQ | Near-term |
Overpriced substantially |
Underpriced | ||
|
Farther expirations |
Overpriced substantially
|
Underpriced substantially |
|||
| IWM | Near-term | Fairly priced | Underpriced | Fairly priced | |
|
Farther expirations |
Overpriced |
Underpriced | |||
Major opportunities are observed in substantially overpriced puts and underpriced calls on SPY and QQQ. IWM options of the near-term series do not demonstrate any meaningful mispricing while puts are overpriced and calls are overpriced in farther expirations.
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:
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 has dropped today as a reaction to the trade tensions among the US and its trading partners, RSI(14) has shifted closer to the oversold zone.
VIX has reacted accordingly reflecting the elevated demand for the downside insurance:
Puts are overpriced; calls are underpriced, both statistically significant.
Puts are overpriced; calls are underpriced, both statistically significant.
Puts are overpriced; calls are underpriced, both statistically significant.
Puts are overpriced; calls are underpriced, both statistically significant.
QQQ's reaction to all these trading wars is similar; RSI(14) has moved to its middle levels, neither overbought nor oversold:
VXN has jumped to 20s levels not seen since April this year:
Puts are overpriced but not substantially; calls are slightly underpriced.
Puts are substantially overpriced; calls are slightly underpriced.
Puts are substantially overpriced; calls are substantially underpriced.
Puts are substantially overpriced; calls are substantially underpriced.
IWM could not stay aside from this selloff also; RSI(14) still demonstrates neither overbought nor oversold condition:
RVX has also jumped to the 18s level reflecting the elevated implied volatility:
Puts are priced almost fairly; calls are slightly underpriced:
Puts are overpriced but not significantly; calls are underpriced:
Puts are overpriced but not significantly; calls are underpriced:
Puts are overpriced; calls are underpriced but not significantly:
