Options Mispricing Snapshot, April 23, 2018

SUMMARY

All three indices finished the last week almost unchanged. They tried to continue their short-term uptrends started from the strong support levels reached in the beginning of February and April but this attempt has been interrupted in the last half of the week. Overall, they remain in the middle of the range formed in recent months.

Implied Volatility stays slightly elevated, RSI(14) is hovering around 50 mark showing neither oversold nor overbought condition.

No substantial changes in options mispricing occurred since the last Snapshot (April, 16): call options are priced fairly except for QQQ, puts are mostly overpriced as usual.

Mispricing summary for the options with 2-5 weeks to expiration:

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)

We apply auto filtering for Volatility index and RSI selecting 300 days in history with the shortest Euclidean distance to their current values.

For each underlying, we select expirations on a range of 2-5 weeks. We present mispricing charts for each expiration and basic PL metrics for the best one-leg strategy  (buying or selling put or call) measured by the Expected profit (annualized).

SPY snapshot

 SPY has recovered almost one-third of the recent 10% correction. RSI(14) level of around 50 shows no oversold condition anymore.

Expiration: May 04, 2018 (DTE 10)

Puts are overpriced, calls overpricing is not statistically significant:

Expiration: May 11, 2018 (DTE 15)

OTM Puts are overpriced, the mispricing of ATM Puts and Calls is not statistically significant:

Expiration: May 18, 2018 (DTE 20)

OTM Puts are overpriced, ATM Puts are priced fairly, Calls mispricing is not statistically significant:

Expiration: May 25, 2018 (DTE 25)

OTM Puts are overpriced, ATM Puts are priced fairly, Calls mispricing is not statistically significant:

The Best One-Leg Strategy

Short Put PL metrics for May 4 expiration:

QQQ Snapshot

As with SPY,  QQQ has also recovered after the Feb-Mar selloff. RSI(14) level of around 50 shows there is no oversold condition anymore.

Expiration: May 4, 2018 (DTE 10)

Puts are substantially overpriced, calls are underpriced but not very significant:

Expiration: May 11, 2018 (DTE 15)

Puts are overpriced, calls are underpriced  - all very significant:

Expiration: May 18, 2018 (DTE 20)

Puts are overpriced, calls are underpriced  - all very significant:

Expiration: May 25, 2018 (DTE 25)

Puts are overpriced, calls are underpriced  - both very significant:

The Best One-Leg Strategy:

Short Put PL metrics for May 11 expiration:

Long Call PL metrics for May 25 expiration:

IWM snapshot

IWM has recovered more than a half of its recent correction. RSI(14) demonstrates neither oversold nor overbought condition:

Expiration: May 4, 2018 (DTE 15)

Puts are overpriced mostly OTM, calls are priced almost fairly:

Expiration: May 11, 2018 (DTE 14)

OTM puts are substantially overpriced, ITM puts are also overpriced but not statistically significant, calls are priced almost fairly:

Expiration: May 18, 2018 (DTE 19)

Puts are overpriced mostly OTM, calls are underpriced but not statistically significant:

Expiration: May 25, 2018 (DTE 24)

Puts are overpriced mostly OTM, calls are priced almost fairly:

The Best One-Leg Strategy:

Short Put PL metrics for May 4 expiration: