Author note: This is the second article in a new regular options market series, titled Options Mispricing Snapshot, in which we compare current market prices of options to their fair values for three major ETFs on U.S. equity indices: SPY, QQQ, and IWM. The previous report is located here. All metrics are calculated using the OptionsSmile platform (see methodology description here).
Using the data provided here, long equity investors who use option strategies such as covered calls, protective puts, collars, etc. - to either protect their portfolios or earn additional income (or both) - can figure out what effects, positive or negative, their option "overlays" have on the total portfolio returns. In other words, an investor can estimate the real cost of portfolio insurance with put options and find out if their covered calls really earn additional income to their holdings (see an example here).
All three indices finished the last week almost unchanged, again. Overall, they remain almost in the middle of the range formed in recent months. RSI(14) is still hovering around 50 mark showing neither oversold nor overbought condition.
Meanwhile, the option pricing picture has changed somewhat. Especially in the near-term expirations where prices of put options have moved closer to their Fair Values and made them priced almost fairly (for SPY and IWM).
Overall, options market seems to calm down and is coming to normal. The same force has driven the call prices down making them mostly underpriced.
Mispricing summary for the options with two to five weeks until expiration:
Puts | Calls | |||
OTM | ATM | ATM | OTM | |
SPY | Near-term expirations – Fairly priced Farther expirations – Overpriced substantially | Fairly priced | Fairly priced | |
QQQ | Overpriced substantially | Overpriced | Underpriced substantially | Underpriced |
IWM | Near-term expirations – Fairly priced Farther expirations – Overpriced | Underpriced | Underpriced |
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 each underlying, we select expirations in a range of two to five weeks. We present mispricing charts for each expiration and basic PL metrics for the best one-leg strategy (buying or selling puts or calls) measured by the expected profit (annualized).
SPY has finished the previous week almost unchanged again; RSI(14) level of around 50 shows no oversold condition.
Source: Stocksharts
VIX is close to its lows since February: Source: Stocksharts
Both puts and calls are priced almost fairly:
Source: Optionsmile.com
Puts are overpriced but not substantial; the mispricing of calls is not statistically significant:
Source: Optionsmile.com
Puts are overpriced, especially OTM; calls are priced fairly:
Source: Optionsmile.com
Puts are substantially overpriced; calls are underpriced but not statistically significant:
Source: Optionsmile.com
The Best One-Leg Strategy
Short Put PL metrics for June 1 expiration:
Source: Optionsmile.com
As with SPY, QQQ has also slightly changed for the week. RSI(14) level of around 50 shows there is neither oversold nor overbought conditions.
VXN also has not changed significantly for the week:
Source: Stocksharts
Put prices have moved closer to their average historical prices (green and red lines coincide) and remain substantially overpriced; calls are underpriced:
Source: Optionsmile.com
Puts are overpriced; calls are substantially underpriced:
Source: Optionsmile.com
Puts are overpriced; calls are underpriced - all very significantly:
Source: Optionsmile.com
Puts are overpriced; calls are underpriced - all very significantly:
Source: Optionsmile.com
The Best One-Leg Strategy:
Short Put PL metrics for May 25 expiration:
Long Call PL metrics for May 25 expiration:
Source: Optionsmile.com
IWM has also slightly changed for the week. RSI(14) demonstrates neither oversold nor overbought condition:
Source: Stochcharts
RVX is testing its lows for the last months:
Source: Stochcharts
Puts are priced almost fairly; calls are underpriced:
Source: Optionsmile.com
Puts mispricing is not statistically significant; calls are underpriced:
Source: Optionsmile.com
Puts are overpriced mostly OTM; calls are underpriced:
Source: Optionsmile.com
Puts are overpriced mostly OTM; calls are fairly priced:
Source: Optionsmile.com
Short Put PL metrics for June 1 expiration:
Source: Optionsmile.com
According to this analysis, interesting opportunities remain in QQQ where puts are still substantially overpriced and calls are underpriced (bullish risk reversal strategy). Among SPY options, the only opportunity remains is selling puts with farther expirations (20-25 trading DTE). IWM has just opened an opportunity for calls buying.
Disclaimer: The information provided in this article is for informational purposes only and should not be considered as an investment advice. Investing in options involves risk of potential loss exceeding the whole amount of money invested. Fair Value of an option is a mathematical expectancy meaning that the expected profit or loss will not realize in each particular trade. It is based on the past performance of the underlying security, which is not guaranteed in the future. I use the approach of the options fair value estimation and finding the market mispricing in my daily trading.
This article was written by
Disclosure: I am/we are long SPY, QQQ, IWM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.