How Options Get Mispriced

Andrew Giovinazzi

BY ANDREW GIOVINAZZI

November 30, 2023

Yo Pit Crazies,

My Weekly Profits Cycle is back at Option Pit. I’ll have more info on that soon, so stay tuned!

Trading options I can trade 3 things, price, time and volatility. All three of those things move option prices. The reason they get mispriced is because customers, what I call “paper” because in the old days their orders came on paper tickets, have ideas. They have direction or income agendas. They don’t care if they sell a put at 12 volatility just that it generates a certain amount of money or taking the stock at a price.

You see the options market is different from the stock market. Investors use options to get stocks at a price or generate incomes for pension requirements. The options prices can get kicked around by these different agendas.

Look at the chart of Pinterest inc (Ticker: PINS) below. There clearly is a divergence between the stock price, 1 year highs, and the 60 day implied volatility, 1 year lows. I like when the rubber band is stretched. Traders have pushed the option prices to year lows.

But are they right? How does a new trader trade this divergence?

Well…… time for you to put your learning on.

Option Values were crushed super low

PINS realized vol is in the high 40s after a seismic move up. And the thing is it is still moving up. In the Easy Trade Button, the PINS Jan19 32.5 call and 30 put were less than $2.00 yesterday for a 50 day hold time. 50 Days! Over the last 30 days the stock is up $10 and I can buy 50 days of move for $2.00. Way … too … cheap. PINS moved $1 in one day and I bought 50 days of move for $2.00.

That math works.

By the end of trading Wednesday the calls were $2.08 and the strangle was $2.50 for an easy 25% return over night. I sold most of the calls to see if there is a pullback or the stock keeps running.

Trading options I can buy more than direction, I can buy movement for a period of time. Stock moves, sell what pays. I did double the strangle size in my PA and would have paid for half of my Easy Trade Button sub on one trade. At least 51 more to come. The more aggressive Boeing Corp (Ticker: BA) was just even at the close.

Just because the market prices options cheaply does not mean it is correct.

To Your Trading Success,