Real-Time Options Mispricing Monitor

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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 Moving Average Convergence Divergence – MACD (26,12,9) – filtering for the current difference between 12-days EMA and 26-days EMA (as a percentage of the underlying’s price)

For the LEI filtering, we manually selecting three intervals (Jan 1993-Oct 2000, Dec 2001-Sep 2007, Jul 2007-now). For the Volatility index and MACD, we apply auto filtering selecting 300 days in history with the shortest Euclidean distance to their current values.

For each underlying, we select expirations on approximately 2, 4, and 6 weeks (end of week expirations only) 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.