Jr Trader: Lumpiness in Options Pricing

Jr Trader:  Lumpiness in Options Pricing

February 13, 2023


I noticed something odd in the SPY options pricing last Friday.  There seemed to be some big price discontinuities in the prices.  Is this normal?  Can we take advantage of it?


Before the weekend, I was looking at SPY CALL prices for Monday, February 13, 3 days from now.  (Note, at close, the price of SPY was 408.4.)


Table:  SPY prices for week of Monday, February 13 as of Friday, February 10.

Symbol

Strike

Expiration

Price

Delta

SPY

410

Mon., Feb. 13

0.96

0.34

SPY

410

Tue., Feb. 14

3.04

0.42

SPY

410

Wed., Feb. 15

3.44

0.43

SPY

410

Thu, Feb. 16

3.88

0.45



Why does delta jump from Monday, February 13 to Tuesday, February 14 from 0.34 to 0.42 (over 25% more)?  We typically see increases in the 2% range.  And, correspondingly, the prices significantly change - they more than triple from 0.96 to 3.04.


Is this some kind of weekend effect / Monday effect - do we typically have low-delta Mondays, followed by a correction on Tuesday?


I looked at the following week’s first trading day - a Tuesday because the markets are closed on Monday due to a holiday, and compared its pricing against the following two days:


Table:  SPY prices for week of Monday, February 20 as of Friday, February 10.

Symbol

Strike

Expiration

Price

Delta

SPY

410

Tue., Feb. 21 

4.57

0.46

SPY

410

Wed., Feb. 22

4.83

0.46

SPY

410

Fri., Feb. 24

5.38

0.47


We do not see any clear discontinuities here.  Was the Monday pricing a one-off?


I also compared the SPY prices to the QQQ prices to see whether this jump were unique to SPY.  I saw the same phenomenon.  


Table:  QQQ prices as of Friday, February 10.

Symbol

Strike

Expiration

Price

Delta

QQQ

300

Mon., Feb. 13

1.70

0.48

QQQ

300

Tue., Feb. 14

4.00

0.50

QQQ

300

Wed., Feb. 15

4.41

0.50



Figure:  SPY prices as of February 10, 2023.  Notice the change in delta and price from February 13 to February 14.  Note that the actual prices may not line up with those I have in the tables above due to a difference between when I recorded the information.


If this price lumpiness happens regularly, we should set our scanners to check prices for days neighboring the expiration dates we are targeting.  For example, perhaps we should sell options when there’s a jump up and buy when there’s a jump down.  Unless, there’s some strangeness in the options market that I don’t know about.


Edit 2022-02-14
The Labor Department released its Consumer Price Index (CPI) report today. Perhaps this is why the deltas were so high. I need to understand better how delta is computed to be able to verify this.

I will also look at the deltas for next week to understand whether this is a Monday issue.

Comments

Post a Comment

Popular posts from this blog

Review of "The Top 3 DEADLIEST Credit Spread Mistakes To Avoid!"

Image
  Summary This video contains three random tips for designing and managing credit spreads. Do not hold spreads to expiration It is tempting to hold a spread to expiration, thereby maximizing return, when all legs expire worthless.  However, two risks come into play: Risk of early assignment - There is a chance of assignment if a position is ITM and close to expiration.  It is also a risk if there are dividends coming up. Empirically, holding to expiration decreases performance (see the Tasty Trade table) as the risk of max loss increases. Prefer wider spreads over many smaller spreads (assuming a given short strike) Having more contracts (i.e., many smaller spreads) increases commission costs. Having a farther out long position decreases its price. On the other hand, there could be more premium with multiple contracts since the incremental premium probably descreases with increasing width. Do not create naked positions I can't have naked positions.  But this is obvio...
Read more

Review of "The Winning Mindset of Successful Traders"

Image
  1.  Prepare for / embrace risk - Accept losses.  Have plans before getting into positions.  Don't let emotions get in the way. 2.  Max losses will happen - Due to probability. 3.  Losing streaks will happen - Size trades appropriately. 4.  Ask, Can I accept max loss? 5.  Have the mindset of a "clerk" - stick with a plan. Very nice video that lists not just attitudes successful traders should have, but also includes a checklist of questions that must be answered before entering a trade. There is also a bit of cheerleading here.  Davis tries to let people know that losses will happen, even to him, so one should not be discouraged when they occur.
Read more

Review of "Generate Monthly Income With The IRON CONDOR"

Image
  Summary This video lays out in detail how to design iron condors for monthly income. DTE:  45 days - shown to be profitable Strikes:  15 to 25 delta and $5 or $10 wings Should get 25% - 30% premium for the width of wing (e.g., $1.50 for $5 wings) Should spend no more than 5% of capital per trade Trade management Close when hit 50% profit Or, at 21 days Because the gamma risk increases after 21 days Can close Or, if close to 50%, close Or, if not close, but inside breakeven price, wait. Optionally Can roll around Narrator does not generally adjust The rest of the video shows how Thinkorswim can generate PnL curves. Upshot This is a very nice video and shows a very clear, well motivated way to implement iron condors.  It is also presented as a framework in the sense that it can be adjusted per investors' tastes.
Read more