How Do Options Get Mispriced?

Andrew Giovinazzi

BY ANDREW GIOVINAZZI

August 23, 2023

Yo Pit Crazies,

There’s seemingly no end or horrible news coming out of financial media lately. All the big rating agencies are downgrading debt of the major players like the US Gov, banks, and brokerages. Now of course, they’ve been wrong in the past, like missing the Great Financial Crisis, so I question the usefulness of the ratings agencies in the first place.

But those issues have been lingering since Fitch downgraded US debt, and it hasn’t really changed. The chart below is VIX and the spike up is the downgrade. US stocks and Volatility have not been the same since.

30 day VIX chart with 1 day candles

The difference between what the market is pricing and what’s happening is two different things. SPX realized vol has remained around 10%. VIX is 17 so that means options are expensive. Below things get more granular. Volatility per term is called Sigma.

They are pricing the Aug23 IV very high and Aug25 relatively low.

Why is that?

NVDA Earnings are Holding Up the Market

Traders are pricing today’s IV very high thinking something will move the market. Nvidia Corp (Ticker: NVDA) has earnings today but not until after the close. I’m not sure why the IV is so high during the trading prior to earnings, but if the traders are bidding the options, the liquidity provider will oblige and charge more for them.

The Aug25 cycle holds the JPow Jackson Hole comments when some sort of rate news might come out. I think all the bank downgrades are tying JPow hands on raising anymore. If he hints at that, that should send stocks higher and recover somewhat from the Fitch downgrade.

Two cycles, both mispriced in my opinion, because folks think something is or is not going to happen. We added a strangle in the Trading Desk for Aug25, so let’s see if I am right.