Options Mispricing Scanner (Using FMP API)
Once you’ve identified potential mispriced options using the scanner (where the theoretical Black-Scholes price based on implied volatility is significantly higher than the price based on historical volatility), here’s how you might approach trading them for maximum profit:
1. Understand What You’re Seeing
- Overpricing means the option’s market premium may be higher than what historical volatility suggests it should be.
- This can imply the option is rich (more expensive), possibly due to market fear, demand, or upcoming events.
2. Trading Strategies Based on Mispricing
a) If Option is Overpriced (IV > HV)
- Consider selling the option (writing calls or puts) to collect the premium.
- Example: Sell call options that look overpriced.
- Profit if implied volatility drops or the stock stays below strike (for calls).
b) If Option is Underpriced (IV < HV)
- Consider buying options to benefit from an expected increase in volatility.
- Example: Buy calls or puts if you expect big moves or volatility to increase.
3. Common Ways to Trade
- Sell Covered Calls if you own the stock and the calls look overpriced.
- Buy Long Calls or Puts if volatility is low but expected to rise.
- Use Spreads to limit risk:
- Credit Spreads when selling overpriced options.
- Debit Spreads when buying undervalued options.
- Straddles or Strangles if you expect volatility increase but are unsure of direction.
4. Risk Management
- Always know your maximum loss and have an exit plan.
- Mispricing doesn’t guarantee profit — market can stay irrational longer than you expect.
- Use stop losses or adjust positions as volatility changes.
5. Additional Tips
- Check upcoming earnings, news, or events that could be driving implied volatility.
- Look for liquidity and tight bid-ask spreads in the options you want to trade.
- Combine the mispricing signal with other analysis: technicals, fundamentals, sentiment.
Example:
If your scanner shows AAPL call options with a strike at $220 priced much higher than historical volatility justifies:
- You could sell those call options to collect a rich premium.
- If the stock doesn’t rise above $220 before expiry and implied volatility drops, you keep the premium as profit.