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:

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).

Volatility is back. It has returned the way it happened just a couple of times in the last years, quite abruptly. Equity markets suffered a sharp selloff last week, volatility indices jumped to the levels last seen in April this year.  

All equity indices entered the oversold domain. Historically speaking, the probabilities of bouncing back are much higher than the continuation of the fall as the macroeconomic conditions look solid (although, high price volatility ahead is guaranteed). That expected move and the inflated IV make put options hugely overpriced and calls underpriced across all the underlyings and expirations.

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

For those who can withstand huge volatility, overpriced put options can provide good opportunities to sell (with proper tail hedging, solid money management, and position sizing). Despite the inflated implied volatility, calls options are good for buying as the historical distribution indicates the high probability of the upward bounce.

SPY and QQQ are fluctuating near their all-time highs while IWM has retreated from the levels reached in the late August. Volatility indices do not demonstrate any stress except for the RVX which reflects the recent pullback of IWM. 

Options on SPY and QQQ demonstrate the typical mispricing in a silent market: puts are overpriced, calls are either underpriced or fairly priced. Meanwhile, IWM put options are in a quite unusual position: despite the oversold condition and elevated implied volatility (RVX), they do not look overpriced. Perhaps, it is the influence of the overall silence in the equity markets. 

Starting from this report, we will be analyzing three expiration series instead of four: with 2, 4, and 6 weeks until expiration. Here is the mispricing summary:

Major opportunities can be found in overpriced puts on SPY and QQQ. Calls on SPY and IWM are mostly underpriced what makes them good candidates for buying.

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:

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.

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:

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.